CGTMSE

1. Scheme Purpose and Structure
The Credit Guarantee Fund Scheme for Micro and Small Enterprises, known as CGS-I, enables eligible lenders to extend credit to viable micro and small enterprises without conventional collateral security or third-party guarantees. CGTMSE does not lend directly to enterprises. It provides a guarantee to the Member Lending Institution (MLI), thereby sharing part of the lender’s credit risk.
The scheme came into force on 1 August 2000 and covers eligible facilities extended from 1 June 2000. It has been revised periodically to expand credit flow, eligible activities, lender categories, guarantee ceilings and differentiated benefits.
2. What the Guarantee Does and Does Not Do
It protects the MLI against an eligible portion of the amount in default, subject to the approved guarantee percentage and ceiling.
It does not replace the lender’s appraisal, monitoring, security creation, recovery or legal responsibilities.
It does not automatically entitle an MSE to a loan. The MLI retains commercial discretion and must approve a viable proposal.
Payment of a claim does not extinguish the borrower’s liability. The lender must continue recovery and share recoveries with CGTMSE as prescribed.
3. Core Definitions
Term
Practical meaning
Eligible borrower
A new or existing micro or small enterprise receiving eligible credit without collateral/third-party guarantee, or with partial collateral under the hybrid model.
Credit facility
Term loan and/or fund-based or non-fund-based working capital, including bank guarantees and letters of credit.
Primary security
Assets created from the credit and/or eligible unencumbered assets directly connected with the financed project or business.
Collateral security
Additional security beyond primary security.
Amount in default
Eligible principal and interest outstanding as defined by the scheme, subject to the guaranteed amount.
Material date
Date the first annual guarantee fee for the covered borrower is credited to CGTMSE.

4. Practical Benefit
For MSEs, the scheme can improve access to formal finance where adequate collateral is unavailable. For lenders, it provides partial credit-risk protection while preserving normal credit discipline. Pricing, sanction terms, borrower contribution and interest remain matters for the MLI under applicable RBI and internal policies.

5. Eligible Borrowers and Activities
New and existing micro and small enterprises engaged in eligible manufacturing and service activities.
Retail and wholesale trading are eligible and aligned with other activities for fee, ceiling and extent of cover.
Educational and training institutions falling within eligible MSE activity are covered on normal scheme terms.
Small road and water transport operators are eligible.
Udyam Registration Number is mandatory for new applications. IT-PAN is generally required, with the scheme FAQ noting limited relaxation for facilities up to ₹5 lakh.
Agriculture, Self Help Groups and Joint Liability Groups are excluded under the current borrower FAQ. Activity and enterprise classification must comply with the MSMED Act and amendments in force.
6. Eligible Lending Institutions and Limits
MLI category
Maximum eligible credit
facility per borrower
Public/private/foreign banks and select financial institutions
Up to ₹10 crore
Small Finance Banks, RRBs, State Financial Institutions and eligible co-operative banks
Up to ₹200 lakh
Microfinance Institutions
Up to ₹50 lakh


The ₹10 crore cap is the maximum CGTMSE exposure ceiling per borrower for applicable MLIs, based on prescribed outstanding/sanction calculations. A larger overall loan may be sanctioned, but the guarantee-covered portion remains subject to the ceiling. Multiple lenders may extend facilities jointly or separately within the aggregate scheme ceiling and individual-MLI limits; security sharing restrictions apply.
7. Eligible Credit Facilities
Term loan alone, working capital alone, or a composite of both may be covered.
Fund-based and non-fund-based working capital facilities may be eligible.
Facilities should be standard and regular on the material date, the business should be operating, and the facility must not have been used to adjust bad or doubtful debt without approval.
MLIs may apply during the loan tenure if the facility was not restructured or in SMA-2 during the previous year. An account already classified as NPA cannot newly enter the scheme.
Facilities above ₹50 lakh require internal MLI rating and must be investment grade.
8. Main Exclusions
Risk already covered by DICGC, RBI, Government, insurer, NCGTC or another guarantee/indemnity arrangement, to the extent of such cover.
Facilities inconsistent with law, Government directions or RBI instructions.
Ordinary facilities backed by collateral or third-party guarantee, except the unsecured portion under the hybrid model.
Facilities without creation of primary security, unless specifically allowed.
Borrowers with prior invoked guarantees and outstanding dues to the Trust arising from their default.

9. Collateral-Free and Hybrid Security Models
Under the standard model, the guaranteed facility is extended without collateral security and third-party guarantee, while primary security is created. Permitted personal guarantees of proprietors, partners, trustees, Karta/coparceners or promoter directors are not treated as prohibited third-party guarantees in the circumstances defined by the scheme.
Under the Hybrid or Partial Collateral Security model, the lender may take collateral for part of the facility and obtain CGTMSE cover for the unsecured portion, up to the applicable ceiling. CGTMSE has a notional second charge on collateral, but the scheme states that separate legal documentation in favour of CGTMSE is not required.
Illustration
Amount
Total sanctioned facility
₹12 crore
Collateral value
₹1 crore
Maximum CGTMSE-covered unsecured portion
₹10 crore
Remaining unsecured, uncovered portion
₹1 crore

Claim calculation under the hybrid model is based on eligible outstanding after netting collateral and the uncovered unsecured portion, limited to the approved guarantee cover.
10. Guarantee Coverage for Approvals after 1 April 2025
Borrower category
Maximum extent of cover
Micro enterprises
85% up to ₹5 lakh; 75% above ₹5 lakh up to ₹10 crore
MSEs in NER, Jammu & Kashmir and Ladakh
80%
Women entrepreneurs / MSEs promoted by Agniveers
90%
SC/ST, PwD, Aspirational District, ZED-certified or Transgender entrepreneurs
85%
All other eligible borrowers
75%
MSEs in RBI-identified Credit Deficient Districts
Additional 5 percentage points over applicable cover, subject to the stated maximum progression

The applicable percentage is applied to the eligible amount in default and remains subject to the approved guarantee amount and scheme ceiling. Guarantees approved before 1 April 2025 continue under the historical coverage specified in Annexure VI.
11. Coverage Tenure
Term loan/composite credit: cover runs through the agreed term, with the scheme providing an additional four months in the expiry date for term-loan accounts.
Working capital only: five years or blocks of five years, renewable on payment of applicable fee. There is no stated maximum number of renewal blocks.
Where working capital accompanies term credit, its cover normally runs concurrently with the term-loan repayment period.

12. Annual Guarantee Fee (AGF)
For guarantees approved or renewed on or after 1 April 2025, AGF is charged on the guaranteed amount in the first year and on the outstanding amount for the remaining tenure, subject to detailed rules for undisbursed, partially disbursed, working-capital and hybrid cases.
Credit slab
Standard AGF rate p.a.
₹0–10 lakh
0.37%
Above ₹10–50 lakh
0.55%
Above ₹50 lakh–₹1 crore
0.60%
Above ₹1–2 crore
0.85%
Above ₹2–5 crore
1.00%
Above ₹5–8 crore
1.10%
Above ₹8–10 crore
1.20%

13. Risk-Based Pricing and Concessions
MLIs with better portfolio performance may receive a 10% discount on the standard rate. Higher-risk MLI portfolios may attract a risk premium up to 70% of the standard rate.
A 10% fee concession applies to eligible social categories: women, SC/ST, persons with disability, Agniveers and transgender entrepreneurs.
A 10% geographic concession applies to eligible NER/Sikkim and specified UT cases up to ₹50 lakh, Aspirational Districts and Identified Credit Deficient Districts.
A 10% concession applies to ZED-certified MSEs.
An enterprise meeting social, geographic and MSE-status categories may receive a maximum cumulative concession of 30%.
The MLI decides whether to pass the AGF to the borrower or bear it. Fee changes are prospective. AGF continues for live covered accounts, including NPA accounts, until a claim is lodged. Non-payment may cause cover to lapse; revival is conditional and may attract penal interest and additional risk premium.
14. Fee Interpretation
The fee rate depends on the borrower’s aggregate exposure slab, the MLI’s risk category and applicable concessions. Borrowers should therefore obtain a written fee calculation from the lender rather than relying only on the standard slab rate.

15. Application and Guarantee Lifecycle
Step
Key action
1. Borrower applies to MLI
Submit business plan, KYC, Udyam, financials, proposed security and other lender-required documents.
2. MLI appraises
Lender assesses viability, repayment capacity, credit history, classification and compliance. CGTMSE does not substitute for appraisal.
3. MLI sanctions and documents
Facility is sanctioned under RBI/internal norms; primary security and permitted guarantees are documented.
4. MLI seeks cover
Application is filed through CGTMSE within the permitted period and eligibility/status conditions.
5. Fee payment
Cover commences when guarantee-fee proceeds are credited to CGTMSE.
6. Ongoing servicing
MLI updates outstanding, pays AGF, monitors conduct, preserves security and reports NPA/default promptly.
7. Closure/renewal
Cover ends on expiry/closure or is renewed where eligible, particularly for working-capital blocks.

16. Responsibilities of the MLI
Use prudent banking judgement, commercial discretion and due diligence to select viable proposals.
Closely monitor the account and safeguard primary security in enforceable condition.
Pay fees, keep data current and notify NPA/default within stipulated timelines.
Lodge claims correctly and on time, after satisfying recall, legal and lock-in conditions.
Continue full recovery action after claim payment and remit CGTMSE’s share of recoveries after permitted legal expenses.
Avoid any act, compromise, waiver, security extension or omission that prejudices CGTMSE without required intimation/approval.
17. Responsibilities of the Borrower
Provide accurate eligibility, ownership, category, activity and financial information.
Use the credit only for the sanctioned purpose and maintain MSE/Udyam compliance.
Service the facility on time and cooperate with monitoring, stock statements, inspections and audits.
Do not assume that CGTMSE coverage waives repayment or makes the Trust the lender.
Inform the MLI about material changes in ownership, management, business activity or security.
18. Conditions That May Terminate or Prejudice Cover
Unauthorised collateral or third-party guarantee is obtained or extended to the covered facility.
AGF is not paid within the prescribed or extended period.
Guarantee tenure expires without eligible renewal.
Material misrepresentation, suppression, deficient appraisal/follow-up or non-compliance affects the account.
The account is classified as fraud, wilful default or non-cooperative borrower for claim purposes.

19. Default, Invocation and Claim Settlement
The lender may invoke the guarantee after recall of the loan and initiation of recovery proceedings through due process of law, subject to all scheme conditions and the applicable lock-in period.
Requirement
Key rule
Lock-in period
Normally 18 months from the later of last disbursement or start of guarantee cover. For guarantees up to ₹10 lakh with tenure up to 36 months, the stated lock-in is 9 months.
Covered interest
Term loan may include one quarter’s interest; working capital may include interest up to NPA date, within the overall cap. Penal interest and other charges are excluded.
First claim instalment
75% of the eligible guaranteed claim is paid, subject to complete and compliant submission.
Final claim instalment
Balance 25% may be lodged after three years from first-claim settlement or after full-and-final OTS receipt, whichever is earlier, after recovery adjustments.
Alternative for legal-waiver cases
Single-instalment settlement may be chosen with guarantee coverage reduced by 15 percentage points.


20. Legal and Recovery Requirements
A Lok Adalat notice is accepted as evidence of initiation of legal proceedings for scheme purposes.
A mere SARFAESI recall notice is insufficient; further action under Section 13(4) is required.
After claim settlement, the MLI remains responsible for recovery. Recoveries must be shared/remitted to CGTMSE as prescribed.
Compromise/OTS arrangements and waivers affecting guarantees or security require appropriate intimation and compliance.
Fraud and wilful-default accounts are not eligible for claim settlement.

21. Common Reasons for Claim Rejection
Legal proceedings were not initiated properly or in time.
The guarantee was not in force because required fee was unpaid.
The account became NPA within 90 days from the material date.
Claim or legal action was initiated after the due date.
The account was classified as fraud, wilful defaulter or non-cooperative borrower.
Material scheme conditions, appraisal, security, monitoring or reporting requirements were breached.
CGTMSE may recall a paid claim with penal interest where serious deficiencies, duplicate claims or suppression of material information are identified.

22. Management-Level Checklist
Before sanction
During cover
On stress/default
Confirm MSE/Udyam eligibility and activity; select correct MLI ceiling; assess viability; identify standard or hybrid model; create enforceable primary security.
File cover on time; pay AGF; update exposure/outstanding; monitor conduct; preserve documents/security; report SMA/NPA and changes promptly.
Recall facility; initiate legally sufficient recovery; observe lock-in and claim deadlines; exclude ineligible charges; lodge complete claim; continue recovery and remit CGTMSE share.

23. Key Takeaways for Borrowers
CGTMSE is a lender guarantee, not a direct loan or subsidy. Apply through an eligible MLI.
Collateral-free does not mean documentation-free or appraisal-free. A viable business, primary security and repayment capacity remain essential.
Maximum coverage is not the same as loan amount. The guarantee is only a percentage of eligible default and is subject to ceilings.
Women-led and other specified priority categories may receive higher coverage and lower fee, subject to correct ownership/category evidence.
Under hybrid security, the lender may take some collateral and cover the qualifying unsecured portion.
Ask the lender to disclose the guarantee amount, coverage percentage, AGF, concessions, who bears the fee, tenure and renewal requirements.