Sandeep Varma

CEO, CGTMSE

On 04^th October, 2023 CGTMSE has touched the milestone figure of approving cumulative guarantees worth Rs 5 Lakh Crore under Credit Guarantee Scheme for Micro & Small Enterprises. Prior to this, during FY 2022-23, CGTMSE for the first time had approved guarantees worth Rs. 1 lakh crore in a single Financial Year surpassing the previous highest figure of INR 56,000 crore achieved during FY 2021-22.  

This is a significant milestone event for the organization, especially when the cumulative guaranteed amount stood at about Rs. 2 lakh crore in two decades of existence of the Credit Guarantee Trust, meaning thereby that the Trust has approved more guarantee in last 3 years than it did in its first 2 decades!!  More than the organizational achievement, it gives us a lot of hope about the bright future of entrepreneurship for the youth of this country who have aspirations to fly high. The acceptance of the guarantee scheme by both the borrowers and the lenders has resulted in achieving this milestone. This is also a result of various entrepreneurship oriented policies adopted by the Govt. of India during  last decade which is bearing fruit.   

Availing credit guarantee coverage for loan facility is generally a requirement of young entrepreneurs or not so old SMEs, where the entities look for more and more capital for investment in business and expansion. The role and importance of SMEs in Indian economy is well documented. The credit gap in this segment has always been the talk of the town. Credit flow to MSMEs have been increasing post Asset Quality Review (AQR) when Banks almost shunned large corporate lending, and MSMEs emerged as viable alternative. However, to a large extent, credit flow to this segment has been mainly thanks  to the priority sector lending targets, despite the low NPA percentage and higher margins for the lenders. Moreover, the contribution of MSMEs towards the GDP is not reflected in the available credit to the sector through formal channel.

Two broad reasons of this lower credit flow this segment can be attributed to information asymmetry and lack of collateral securities. SMEs often fail to avail a credit facility from a formal channel due their limited capacity in in producing sophisticated financial statements and financial models. Their no or limited proven operational track-record, credit history also creates barrier between a formal lender and an SME. With no real data to assess risk, a potential lender attributes a high risk of default to the borrower, and, in the absence of adequate collateral, the problem gets compounded and eventually results in credit denial. At this point of time, Credit Guarantee Schemes (CGS) act as a tactical instrument for credit enhancement and risk transfer. By protecting a part or full of the applied loan amount with a guarantee, the scheme reduces the risks of the lender and eventually helps a collateral constrained viable business in availing timely credit facility. Since CGS can derive a multiplier effect in credit flow with a limited corpus support from the Government, this also becomes a preferred tool by policy makers to address the SME financing gap, while limiting the burden on public finances.

In this context, CGTMSE can address part of the problem, i.e the collateral requirement. But the other big problem of data asymmetry is also required to be resolved. Fortunately, two of the Government’s flagship programs, viz. “Make In India” and “Digital India” are not only propelling business growth in MSME space, they are also generating a large number of data. MSMEs were temporarily affected by the structural reforms such as GST but bounced back quickly and more strongly. MSMEs are also required to periodically file their sales and purchase data under GST. Under the aegis of Digital India, some of the new and innovative Fintechs are using these GST data and producing unprecedented insights and analytics, which are being used as a tool by some of the lenders to decide about credit worthiness of an MSMEs. Further, Credit Bureaus have eventually brought in a credit discipline among most. These days, people are aware of relevance of their credit scores and genuinely try to maintain a healthy score for future loan requirements. With GST ecosystem and other Digital India initiatives evolving everyday and coupled with credit bureau data, I am sure, this will eliminate the information asymmetry in MSMEs.

Among a gloomy global economic scenario, India stands as a rare bright spot. Many are looking at India to drive the global economic recovery. India is also poised to become an USD 5 Trillion economy and go beyond it soon. This will increase the economic activity multi fold, which will require an enormous amount of investment in domestic font. While the youth in India are ready with their innovations and risk-taking abilities to embark upon an entrepreneurial journey and become job creators, the country will fall short of immovable collateral securities to secure a credit facility. In this context, the next growth drivers for SMEs are going to be data derived from GST, various Digital Initiatives & Credit Bureaus etc. and CGTMSE who together will ensure adequate and timely credit flow to SME sector.

In India’s journey of next economic superpower, at Rs. 5 lakh Crore is just a new beginning for CGTMSE.