Examine the importance of revamping the Credit Guarantee Scheme in improving the credit flow to the MSME sector?
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is jointly set up by Ministry of Micro, Small & Medium Enterprises (MSME), Government of India and Small Industries Development Bank of India (SIDBI) to catalyse flow of institutional credit to Micro & Small Enterprises (MSEs). Credit Guarantee Scheme (CGS) was launched to strengthen credit delivery system and to facilitate flow of credit to the MSE sector, create access to finance for unserved, under-served and underprivileged, making availability of finance from conventional lenders to new generation entrepreneurs.
Credit Guarantee Schemes (CGSs) offer government intervention to unlock finance for SMEs. A CGS provides third-party credit risk mitigation to lenders through the absorption of a portion of the lender’s losses on the loans made to an enterprise in case of default, typically in return for a fee.
Need for revamping the scheme
- While MSMEs are critical for employment generation, the credit flow into the segment remains abysmally low.
- An estimated 15 per cent of MSME debt demand is funded by the formal financial sector and only 32 per cent of MSMEs are served by financial institutions.
Importance of MSME
- More than half of them are in India’s rural areas.
- Employment generation
- 30 percent of India’s GDP is generated by MSME’s which employs 11 crore people.
- It accounts for almost 40% of overall exports.
- Self-sufficiency (Atmanirbhar Bharat)
Challenges faced in attaining credit
- The reach is poor,
- Driven by factors such as poor unit economics for bigger lenders,
- Low levels of formalisation of enterprises,
- A high level of information asymmetry between enterprises and lenders,
- An incentive system that favours risk aversion of the lending officers.
Way forward
- A sharper focus on learning the credit profiles to create lending solutions with agility, and aim to amplify successful solutions in the ecosystem;
- A comprehensive measurement tool to assess the strength and weakness of the key links of the value chain;
- Deeper engagement from private sector and MSMEs in the program for learning and quicker adoption of successful outcomes.
- ‘A Test and Learn’ Framework with focus on ‘New to Credit’ SMEs: Given the general apprehension that SME loans are risky, bankers seek collaterals. Several Fintechs /NBFCs have solutions that provide for other viable models. Based on their success they can be scaled. 3-5 per cent of the overall trust fund can be set aside for a ‘‘test and learn’ initiative, wherein a set of ‘sand boxes’ can be designed with promising partners to expand lending.
- Comprehensive Tracking and Measurement Mechanism: Currently, the prerogative of extension of credit guarantee to a MSME borrower remains with the branch functionaries and lacks transparency for oversight/review by the MLI’s higher authorities. Also, there is no mechanism to assess the demand for credit guarantee in the sector. CGTMSE could evolve a suitable tracking system to help MLIs review cases that are denied CGMSTE cover by its branches and also capture the data regarding the need for CGTMSE-backed assistance in the sector.
- Deeper Engagement with the Broader Ecosystem: For SME lending to open up at a faster pace, early and deeper engagement with a broader set of stakeholders would help.
How to structure
- Give an intro about Credit Guarantee Scheme
- Discuss the need for revamping the scheme and why an efficient cash flow to the MSME sector is needed.
- Mention the challenges faced in achieving this
- Suggest measures
- Conclude
