Linking Credit Guarantee to MSME Ratings Can Boost Lending

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Linking Credit Guarantee to MSME Ratings Can Boost Lending

 Micro and small enterprises (SMEs) are expected to benefit from the government’s move to double the eligible credit limit under the Credit Guarantee Scheme (CGS) to 2 crore from 1 crore and extend it to cover loans given by non-banking finance companies.

 
However, the challenges are many including the high level of guarantees given under the CGS, procedural delays, under claim settlement and interest rate restrictions.  For one, in the past five financial years, the credit guarantee fund trust for micro and small enterprises has approved guarantees totalling Rs 89,258 crore, compared with a corpus of Rs 2, 432 crore. Further, collateral free, or unsecured lending to start ups is intrinsically riskier than financing MSEs with vintage business. CGS caps the downside risks for lenders by offering recourse to guarantees. However, some private and foreign banks, NBFCs choose to enter the high risk zone of unsecured loans with an eye on high rewards. Private banks have stayed away from CGS so far.
 
The ratio of guarantees approved to overall corpus is high at 36 times. CGS can deepen financial inclusion through an independent transparent and efficient claim settlement process that would involve a fee-based robust credit health assessment of both MSEs under the Performance and Credit Rating Scheme.
 

   

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