To Rs 10 lakh from the current Rs 5 lakh for smaller units
The working group set up to review the Credit Guarantee Scheme of the Credit Guarantee Fund Trust has recommended the mandatory doubling of the limit for collateral-free loans to micro and small enterprises (MSEs) to Rs 10 lakh from the current Rs 5 lakh. Other proposals inlcude: an increase in the extent of guarantee cover, absorption of guarantee fees for collateral-free loans by the Credit Guarantee Fund Trust for MSEs (CGTMSE) subject to certain conditions, lower guarantee fees for women entrepreneurs and enterprises in the north-east and simplification of the procedure for filing claims with CGTMSE.
The setting up of the working group was announced in the annual policy statement for 2009-10. The report was released by Finance Minister Pranab Mukherjee earlier this month, as part of the platinum jubilee celebrations of the Reserve Bank of India.
On the guarantee fee for collateral-free loans of up to Rs 10 lakh to micro enterprises, the group recommended that this should be borne by CGTMSE, subject to the provison that the trust be free to adjust the guarantee fee both downwards and upwards based on the evolving distribution of claims. This is intended to ensure that CGTMSE remains self-financing and self-sustaining in the long-term.
The group recommended that CGTMSE may charge a composite, all-in guarantee fee of 1 per cent per year and appropriately realign downwards the guarantee fees chargeable to women entrepreneurs, micro enterprises and units located in north-eastern region, including Sikkim. The trust may also annually review the guarantee fee to be charged on the basis of the valuation model suggested by the group.
Another recommendation is that the Union government must consider exempting both the guarantee fee and the income on investments of the trust from income tax, as is the practice internationally for such non-profit credit guarantee organisations.
Consistent with the recommendation of doubling of the collateral-free loan limit, the guarantee cover up to 85 per cent of the amount in default is to be made applicable to credit facilities to micro enterprises of up to Rs 10 lakh. However, the extent of guarantee cover for credit facilities above Rs 10 lakh and up to Rs 50 lakh will be 75 per cent; and for credit facilities in excess of Rs 50 lakh and up to Rs 1 crore will be 75 per cent up to Rs 50 lakh and 50 per cent of the amount in excess of Rs 50 lakh, as per the existing provisions of the scheme.
Simplification of procedure has also been recommended. Currently, banks have to initiate legal action in all cases before filing a claim with the Guarantee Trust. With a view to simplifying the procedure for filing claims in respect of small loan accounts, initiation of legal proceedings as a pre-condition for invoking of guarantees is to be waived for credit facilities of up to Rs 50,000.
Member Lending Institutions (MLIs) of the trust may be allowed to invoke guarantees within a period of two years from the date of classification of the account as an NPA, instead of the current prescription of one year.
The final claim is to be paid by the trust to the MLIs within a period of three years after a decree of recovery has been obtained, instead of the current procedure of releasing the final claim only after the decree of recovery becomes time-barred, i.e., 12 years after the decree is obtained.
It is expected that implementation of the recommendations will result in enhanced usage of the guarantee scheme and facilitate increase in quality and quantity of credit to MSEs, leading to sustainable inclusive growth.
