CGTMSE Scheme: The Guarantee Behind Collateral-Free MSE Loans
CGTMSE pays the bank part of the loss on a failed small business loan. It never cancels what the borrower owes.
CGTMSE is a government-backed guarantee for small business loans given without collateral. If a micro or small enterprise (a small shop, workshop or service business) borrows without pledging property, and the loan later fails, CGTMSE pays the bank a large part of the loss.
For a recovery agent, the key point is simple: the guarantee protects the bank, not the borrower. The borrower still owes the full amount, and recovery continues even after CGTMSE pays the bank.
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The Words You Need
- CGTMSE
- Credit Guarantee Fund Trust for Micro and Small Enterprises. A trust set up by the Government of India and SIDBI (Small Industries Development Bank of India) to guarantee small business loans.
- Collateral security
- Extra security given on top of the loan's main security, for example a house mortgaged against a shop's working capital loan.
- Third-party guarantee
- A promise by another person (a relative, a friend) to pay if the borrower does not.
- Member Lending Institution (MLI)
- A bank or lender that has signed up with CGTMSE and can get its loans covered.
- Annual Guarantee Fee (AGF)
- The yearly fee the lender pays CGTMSE for the cover. The lender may recover it from the borrower.
What the Scheme Covers
These figures are from the CGTMSE scheme document (CGS-I) updated as on 1 April 2025.
- check_circleWho: new or existing micro and small enterprises, including retail and wholesale traders. Medium enterprises are not covered.
- check_circleWhat: term loans and working capital given without collateral and without a third-party guarantee.
- check_circlePartly secured loans: under the hybrid model, the unsecured part of a loan can still be covered.
- check_circleMaximum: up to ₹10 crore per borrower for public sector, private and foreign banks; up to ₹2 crore for small finance banks, regional rural banks and co-operative banks; up to ₹50 lakh for microfinance institutions.
- check_circleFee: the standard annual guarantee fee runs from 0.37% a year on the smallest loans (up to ₹10 lakh) to 1.20% on loans above ₹8 crore.
How Much of the Loss CGTMSE Covers
Cover is a percentage of the amount in default, not the whole loan. Some examples from the scheme document for guarantees approved from 1 April 2025:
| Borrower | Maximum cover |
|---|---|
| Micro enterprise, loan up to ₹5 lakh | 85% |
| Women entrepreneurs | 90% |
| SC/ST entrepreneurs, persons with disability, MSEs in aspirational districts | 85% |
| All other borrowers | 75% |
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When the Loan Fails: How the Bank Claims
- 1
The account becomes an NPA
The loan must be classified as a non-performing asset while the guarantee is in force.
- 2
The lock-in period must be over
Normally 18 months from the last disbursement or the guarantee start date, whichever is later (9 months for guarantees up to ₹10 lakh with a tenure up to 36 months).
- 3
Recovery action must have started
The bank must recall the loan and start legal recovery. A SARFAESI demand notice alone is not enough; the bank must take a step such as possession. Legal action is waived where the outstanding is up to ₹10 lakh.
- 4
The claim is filed in time
Within 3 years from the NPA date or the end of the lock-in, whichever is later.
- 5
CGTMSE pays in two parts
75% of the guaranteed amount within 30 days of a complete claim. The remaining 25% can be claimed after 3 years from the first payment, or after a one-time settlement is fully received, whichever is earlier.
The Guarantee Does Not Cancel the Debt
After a claim is paid, the bank must keep recovering and share every rupee it recovers with CGTMSE in proportion, after deducting court and advocate fees. So a borrower who says "the government guarantee will pay my loan" is mistaken. Accounts the lender has classified as fraud or wilful defaulter are not eligible for a claim at all.
How the DRA Exam Tests This
Expect direct recall questions: what the letters stand for, which enterprises are covered (micro and small, not medium), and that no collateral or third-party guarantee is taken. A common trap is mixing up the two 75% figures: 75% is the cover for most borrowers, and separately, CGTMSE pays 75% of the guaranteed amount as the first claim instalment.
Scenario questions usually test the recovery angle: a shopkeeper's loan backed by CGTMSE has turned NPA. Does the borrower still owe the money? Yes. The bank recovers in the normal way, within the same conduct rules that apply to every other loan.
FAQs
What is the CGTMSE scheme in simple words?expand_more
It is a guarantee for small business loans given without collateral. If the loan fails, CGTMSE pays the bank part of its loss. The borrower gets a loan without pledging property, and the bank takes less risk.
If my loan is covered by CGTMSE, do I still have to repay it?expand_more
Yes. The guarantee is between the bank and CGTMSE. The full debt stays with the borrower, and the bank continues recovery even after CGTMSE pays a claim.
What is the maximum loan under CGTMSE?expand_more
Up to ₹10 crore per borrower for most banks, as per the scheme document updated on 1 April 2025. Small finance banks, regional rural banks and co-operative banks can cover up to ₹2 crore, and microfinance institutions up to ₹50 lakh.
Who pays the CGTMSE fee?expand_more
The lender pays the annual guarantee fee to CGTMSE. The scheme allows the lender, at its discretion, to recover it from the borrower.
Next steps
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