Guaranteeing credit

Irrefutably, the factor of production in a business venture, which deals with the vagaries of risk and uncertainty, is entrepreneurship. Besides nurturing the other three factors of production, viz. land, labour and capital, for an enterprise to flourish, it is imperative to hone entrepreneurial skills. Entrepreneurship development, bolstered by facilitating access to finance, technology and marketing, along with easing out doing business, have been at the forefront of Government of India’s policies. The recent spectrum of policy interventions has been wide-ranging—from introducing new schemes for quality compliance to strengthening schemes for collateral free loans; and from promoting export-oriented enterprises to extending non-tax benefits for an extended period.

Entrepreneurs are known to grab opportunities, even in the worst adverse situations, the case in point being the challenges posed by the recent global COVID pandemic of 2020-2022, which debilitated a substantial part of the world. But the enterprising ones were quick to seize the chance and transformed challenges into opportunities viz. developing and distributing vaccines, reaching the unreached through contactless home deliveries, devising innovative ways of working from home, and encouraging online services at workplaces to help reduce overall consumers’ and producers’ costs.

Research indicates that third-party loan guarantees improve market liquidity and have a positive overall welfare effect. The objective of loan guarantees is to protect the lender against default by the borrower, who typically has a low credit rating and may not have any collateral. Guarantee acts as a tool of credit enhancement and ensures that there is no adverse selection. The objective is met by a guarantee extended by a third party in return for a fee, which needs to be different for diverse segments of borrowers so that moral hazard can be avoided. This is exactly the principle on which the Credit Guarantee Scheme (CGS) for Micro and Small Enterprises (MSEs) is based.

CGS extends guarantees to 235 Member Lending Institutions (MLIs) for amounts of up to Rs 5 crore lent by MLIs to MSEs. The guarantee coverage of up to 85 per cent mitigates the asymmetry of collateral requirement by the lender and lack of collateral of the borrower. To run CGS, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was started in the year 2000, with a gradual creation of a corpus of Rs 2,500 crore, further augmented by Rs 5,000 crore in 2017-18. Pursuant to Budget 2022-23 announcement, another Rs 9,000 crore was infused into the corpus of CGTMSE in March-April, 2023. In December, 2023, the minimum annual guarantee fees charged by CGTMSE was reduced by 50 per cent, taking it to 0.37 per cent and the ceiling on the amount of loan under CGS was raised from Rs 2 crore to Rs 5 crore. In February, 2024, a special dispensation was introduced for smaller loans for Informal Micro enterprises by fixing the minimum annual guarantee fees for loans up to Rs 10 lakh at 0.37 per cent and from Rs 10 lakh to Rs 20 lakh at 0.45 per cent. During 2023-24, under CGS, approval of guarantees increased substantially and stood at more than 2 lakh crore, which is about one-third of the cumulative guarantees of Rs 6.29 lakh crore issued by CGTMSE during its existence since 2000.

Credit flow to the MSME sector has enhanced 117 per cent in the last 10 years, i.e. from Rs 10.39 lakh crore to Rs 22.60 lakh crore in 2023. Timely, accessible and adequate availability of credit enhances both efficiency and productivity of enterprises. The role of Government through public policies aimed at entrepreneurship development is clear. Entrepreneurs need to be aware of the changing policy landscape and avail of benefits of welfare interventions.

The writer is Additional Development Commissioner, Ministry of MSME, Government of India, Views expressed are personal