Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)

For most micro and small enterprises in India, the barrier to bank credit is not the bank's interest rate but the bank's collateral requirement. Even a viable business needs working capital and term loans, and banks traditionally insist on land or property as collateral for loans above a certain threshold. The result is that many viable businesses either remain undercapitalised or borrow from informal lenders at much higher rates.

CGTMSE addresses this constraint by providing a credit guarantee to the bank. The Trust, established jointly by the Ministry of MSME and SIDBI, takes on a defined share of the credit risk. If the borrower defaults, the bank can claim a defined portion of the loss from the Trust. This reduces the bank's expected loss to a level where the loan is viable even without collateral.

The scheme has grown substantially since its 2000 launch. As of 2025, CGTMSE has approved guarantees on more than 60 lakh loan accounts with cumulative credit of over Rs 8 lakh crore. Annual guarantee approvals now exceed Rs 1 lakh crore.

The guarantee cover percentage depends on borrower category and loan size. For women entrepreneurs, SC entrepreneurs, ST entrepreneurs and units located in northeastern states or Andaman and Nicobar or Lakshadweep, the cover is 85 percent of the credit facility up to a defined ceiling. For micro enterprises generally, the cover is 80 percent for loans up to Rs 5 lakh and 75 percent for loans above Rs 5 lakh. For other borrowers, the cover is 75 percent for loans up to Rs 50 lakh and 50 percent for loans above Rs 50 lakh up to Rs 5 crore.

The cover is on the principal amount in default plus a defined component of interest. It is not a 100 percent cover. The bank still bears a residual risk of 15 to 50 percent depending on the slab, which is why credit appraisal remains rigorous even with CGTMSE.

For the borrower, the practical effect is that a bank that would otherwise demand land or property as collateral can lend without any. The bank may still ask for a personal guarantee from the proprietor or directors, but this is different from collateral; it does not block any specific asset and is invoked only after default.

The Trust charges an annual guarantee fee from the lending bank. The fee depends on loan size and borrower category. Typical rates range from 0.37 percent per annum of the outstanding loan amount for small accounts up to 1.35 percent for larger accounts and certain risk categories. Discounts apply for women, SC, ST and northeastern borrowers.

The bank typically passes the guarantee fee to the borrower as a part of the effective interest cost. For a loan at a quoted rate of 11 percent per annum, the borrower may see an additional fee component of 0.5 to 1 percent depending on the slab. This is still typically far below the cost of informal collateral free credit.

The fee is paid annually on the renewal anniversary of the guarantee. If the borrower closes the loan early, the guarantee is closed and no further fee is payable. If the borrower defaults and the guarantee is invoked, recovery from the borrower continues, and any recovery is shared between the bank and the Trust in proportion to their original risk shares.

On default, the bank classifies the account as non performing and proceeds with recovery action under the SARFAESI Act and other applicable law. After completing initial recovery steps and quantifying the loss, the bank invokes the CGTMSE guarantee through the online portal. The Trust processes the claim and pays out the guaranteed share, typically within 30 to 60 days.

For the borrower, the default is reported to credit bureaus exactly as it would be for any other defaulted loan. The CGTMSE guarantee does not protect the borrower; it protects the bank. The borrower's credit score drops, future loans become difficult and the personal guarantee, if signed, can be invoked.

Borrowers sometimes assume the guarantee means they do not have to repay. This is incorrect and causes serious harm to their long term creditworthiness. Treat the loan exactly as you would treat any secured loan from the perspective of repayment discipline.

You do not apply to CGTMSE directly. The application is to the bank or NBFC. When the bank assesses the loan and confirms that no collateral will be taken, it processes the loan under the CGTMSE framework. The borrower has the right to ask the bank to apply CGTMSE for collateral free coverage, especially if collateral is the only sticking point in the loan approval.

Prepare a strong Udyam registration, a clear project report and clean financials. Banks are more willing to extend collateral free credit under CGTMSE when the underlying credit appraisal is solid. The guarantee complements credit appraisal; it does not replace it.

Where one bank declines, another may approve. PSU banks have historically been the largest CGTMSE users but private banks and NBFCs have grown their share. Approach two or three lenders and compare not just the interest rate but the total cost including guarantee fees and processing charges.

• 01New and existing micro and small enterprises registered or eligible to register under Udyam
• 02Manufacturing units with original investment in plant and machinery up to Rs 25 crore
• 03Services units with original investment in equipment up to Rs 10 crore
• 04Loan availed from a member lending institution, that is, a bank or NBFC enrolled with CGTMSE
• 05Loan must be without collateral and without third party guarantee

• §Udyam registration certificate
• §Loan application and project report submitted to the bank
• §KYC documents of proprietor or partners or directors
• §Bank statements and existing loan accounts
• §GST registration where applicable
• §For enhanced cover categories, certificate of women ownership, SC or ST status or northeastern domicile

• Loan involves collateral or third party guarantee, making CGTMSE cover non applicable
• Borrower not classified as MSE; medium and large enterprises are outside the scheme
• Loan amount above Rs 5 crore per borrower
• Bank or NBFC not a member lending institution of CGTMSE
• Project not viable on credit appraisal even though guarantee is available; the bank still declines

• CGTMSE operational instructions and circulars, Credit Guarantee Fund Trust for Micro and Small Enterpriseslink ↗
• CGTMSE annual report and guarantee statistics, CGTMSE and Small Industries Development Bank of Indialink ↗