MSME sector welcomes new Credit Guarantee Scheme for Co-Lending

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), a collaborative organization set up by the MSME Ministry and the Small Industries Development Bank of India (SIDBI) to implement the central government’s Credit Guarantee Scheme has announced a new programme - the Credit Guarantee Scheme for Co-Lending (CGSCL), multiple media reports say. The scheme which came into immediate effect on February 25, 2022 to address the issue of unsecured loans for the MSME sector. has been heartily welcomed by the sector. 

As per the details of the scheme, the CGTMSE will provide guarantee coverage to all unsecured loans, i.e., loans given without collateral to eligible borrowers by eligible scheduled commercial banks and Non-Banking Financial Companies (NBFCs) who enter into a co-lending partnership with each other. The Co-Lending model of catering to the credit needs of priority sectors such as the MSMEs, was approved by the Reserve Bank of India in 2020.

In its circular, the CGTMSE said that the Trust will provide a maximum coverage of INR 200 Lakh for secured loans, and INR 100 Lakh for unsecured loans to new or existing MSME disbursements. The cap of INR 200 Lakh or INR 100 Lakh is the ‘maximum guarantee coverage limit per borrower under CGSCL’ based on the outstanding credit facilities extended by the partners in a co-lending model agreement, the statement said. 

Borrowers can also avail incremental credit as long as it is within the reduced exposure limit of the landing partners, again subject to a maximum limit of INR 200 Lakh for secured loans and INR 100 Lakh of collateral-free loans. These loans are subject to the condition that the credit facilities provided by the Member Lending Institutions (MLI) are deemed as standard as per RBI guidelines, the business of the borrower has not ceased to exist and that the credit in question is not used to adjust any bad loans without the prior knowledge of the Trust.

In a ‘hybrid security’ model that the Trust has introduced in the scheme, the co-lending partners can seek credit guarantee for part of the loan (with the other part secured by the borrower’s collateral), as long as it does not exceed the above-mentioned caps. 

According to the guidelines laid down by the RBI, the co-lending arrangement the co-lending arrangement between banks and NBFCs can take two forms:

First, where both the bank and the NBFC lend jointly through an escrow account, after both parties are satisfied with the due diligence of the borrower. The bank will provide an ‘irrevocable commitment’ to write into its books, its share of the loan that was originated by the NBFC. In this case, the Trust will provide the guarantee for the individual loan or credit facility.

In the second form, the bank in a co-lending partnership agrees to take into its books those loans that are originated by the NBFC as per the agreement. The guarantee here will cover the specific loans or credit facilities that are selected for co-lending, the circular explains.

A report in news portal MoneyControl quotes several industry leaders expressing enthusiasm for the new scheme in support of co-lending, which they think is the missing piece of the puzzle in meeting the huge credit gap in the MSME sector. 

Considering the need for collateral-free loans, especially by micro and small enterprises, the guarantee cover for such loans will provide a ‘big thrust’ to the entry of public sector banks in this area of lending, Sachindra Nath, executive Chairman of MSME lending firm U Gro Capital was quoted as telling the portal.

With the stamp of approval in the form of a credit guarantee, NBFCs will now be able to increase their customer base and retain their present customers, Jinay Gala, associate director at India Ratings & Research told MoneyControl.

Just on February 28, the Union Bank of India entered into a co-lending agreement with NBFC Ambit Finvest, that services MSME customers in 11 states. The Bank said that the partnership was a means for it to fulfill its aim of meeting the underserved credit needs of MSMEs with ‘tailor-made’ financial products, the report said. 

Interestingly, even foreign banks have begun exploring co-lending to tap into the ‘new normal’ of market realities post COVID-19. Standard Chartered Bank and Edelweiss Housing Finance recently entered into a co-lending arrangement for property deals, the MoneyControl report said, where EdelWeiss will originate 20% of the loan book and Standard Chartered Bank will handle the rest of the 80% in an ‘asset light’ model, the joint statement by the two partners said.