Credit Guarantee Fund for Micro Units (CGFMU) Scheme

The Credit Guarantee Fund for Micro Units (CGFMU) scheme is a government initiative aimed at supporting emerging businesses, especially small and micro enterprises, in India. It offers a guarantee cover for loans obtained from lending institutions.

In case of a loan default, the lending institution can recover a portion of the amount from the government. This scheme helps smaller businesses in the manufacturing, service, and trading sectors access necessary funds.

Under the Pradhan Mantri Mudra Yojana (PMMY), businesses can qualify for loans of up to ₹10 Lakhs. The application process is simple, and funds are typically disbursed within 7 to 10 days.

The primary objective of this scheme is to provide collateral-free credit of up to ₹10 Lakhs to small and micro units. Additional objectives include: 

• Providing collateral-free loans to small and micro units

• Offering guarantee cover to lending institutions under CGFMU

• Reducing risk for lenders and encouraging them to extend credit to smaller businesses

• Supporting smaller businesses and facilitating access to finance for growth and development

The Credit Guarantee Fund Scheme offers loans to smaller enterprises with a straightforward application process and no requirement for collateral. Some key benefits of this loan scheme include: 

• Through this scheme, the government provides collateral-free loans, eliminating the need to pledge any assets to secure funds. This supports businesses financially while reducing risk for lenders. 

• Business owners can access a maximum loan amount of ₹10 Lakhs to meet various business needs. 

• The Government of India backs loans obtained through financial institutions in case of default. 

• The application process is simple and ensures quick disbursal. Upon successful application, funds are typically credited within 7-10 days.

The nature of a CGFMU (Credit Guarantee Fund for Micro Units) facility is to provide a credit guarantee for micro and small enterprises, acting as a third-party guarantee to cover a portion of a loan in case of borrower default. It does not lend money directly but encourages lending institutions to offer collateral-free loans under schemes like PMMY (Pradhan Mantri Mudra Yojana) by reducing their risk, with the guarantee covering typically 75% of the defaulted amount. 

Key Aspects of a CGFMU Facility

• Guarantee cover: CGFMU compensates lenders for a portion of loan losses if borrowers default, within scheme limits.

• Collateral-free lending: Guarantees let banks offer loans without requiring physical security from micro and small businesses.

• Government support: Backing by the Government of India boosts lender confidence and increases credit flow to underserved sectors.

• Scope: Covers microloans under PMMY (including MUDRA) and overdrafts on PMJDY accounts, typically for small ticket sizes.

• Risk reduction: Lowers perceived credit risk, encouraging loans to startups and tiny enterprises and supporting formalisation.

• Delivery: Loans are issued through registered banks and financial institutions that participate in the scheme.

• Oversight: The National Credit Guarantee Trustee Company (NCGTC) manages, monitors and administers the CGFMU.

The CGFMU Scheme offers guarantee cover for microloans provided under PMMY by participating lending institutions, up to ₹20 Lakhs for small-ticket credit needs. It also includes overdraft limits granted on Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts, up to ₹10,000. Additionally, CGFMU covers Self Help Group (SHG) loan portfolios between ₹10 Lakhs and ₹20 Lakhs.

The loan tenures and interest charges under the CGFMU arrangement are set by each lending institution and can differ across lenders. Nevertheless, participating lenders must follow applicable regulations and CGFMU conditions to qualify for the guarantee. This support aims to promote financial inclusion and business formalisation in MSMEs.

The eligibility criteria for the CGFMU loan scheme extends to businesses covered under the Pradhan Mantri Mudra Yojana (PMMY). Other CGFMU scheme eligibility terms include: 

• You need to have a small business unit engaged in manufacturing, trading, or services

• Individuals with a micro business unit, such as vendors or artisans

• Your business can be either new or existing

• The applying business has to be registered under the GST

If you are a business owner applying for the CGFMU loan scheme, you must keep the following documents ready: 

• KYC Documents: PAN card, Aadhaar card, passport, or voter ID

• Business Proof: GST registration, business licence, or incorporation certificate

• Financial Statements: Bank statements, profit and loss account, and balance sheet

• Loan Application Form: Duly filled and signed

• Income Proof: ITR filings or audited financial reports

To apply for this credit guarantee scheme, you need to approach a lending institution providing funds under this scheme. Here is how:

1. Explore the lending institutions under the CGFMU loan scheme 

2. Visit a nearby bank branch for offline processing or use the lender's portal for quick online completion

3. Fill out the application form to apply for the scheme and submit the relevant documents 

4. The lender will decide and confirm the loan amount as per your eligibility

5. After verification, the lender will disperse the funds to your account within 7-10 days

The CGFMU scheme, launched by the government for small and micro units, has been beneficial for approximately  112,31,088 businesses, where over ₹154,000 Crores have been guaranteed. Here are some other details:

• As of March 2022, over 100 lakh small and micro businesses in India have benefited from the CGFMU loan scheme. This initiative enables businesses to secure funding and drive innovation to support their growth.

• As this scheme provides loans without requiring collateral, it allows businesses to obtain funding more easily and in a shorter time.

• These loans are facilitated by third-party banks and NBFCs, ensuring efficient and accessible financing.

• Since the Government of India provides a guarantee cover of up to 75%, banks and lenders are incentivised to extend financial support to businesses.

• The repayment tenure for these loans is five years, reducing the financial burden on businesses in their growth phase.

Apart from the benefits provided by the scheme, certain challenges of CGFMU have been identified, particularly the reduced benefits for banks. 

• As the government provides a 75% guarantee cover on these loans, the benefits received by banks and lending institutions are lower

• The application process is time-consuming and complex

• The claim settlement procedure under the CGFMU scheme is lengthy

• Banks face high-security risks due to the absence of collateral

• The guarantee fee and refinancing charges are significantly high

This scheme aims to offer a fully online and seamless application process. In the future, complete digitisation is expected, along with a real-time data upload feature. Data management is anticipated to improve, making the application process more transparent.