Page 26 - Banking Finance May 2025

ARTICLE

ensuring that only financially stable businesses benefit from
the scheme.

For MSMEs requiring loans exceeding Rs. 100 crore, the
scheme allows them to split the repayment schedules into
two components: one for Rs. 100 crore and the second
for the remaining amount. This structured approach ensures
that repayment is manageable and aligned with business
growth.

A major advantage of the scheme is the 60% guarantee
cover, which significantly reduces the collateral burden.
MSMEs that previously faced difficulties securing credit due
to a lack of assets now have better opportunities for fund-
ing. The guarantee helps financial institutions mitigate risks, Efficient Recovery Mechanism: Financial institutions are
making them more willing to lend to MSMEs. required to follow structured recovery proceedings, ensur-
ing that defaults are handled systematically.
Additionally, the scheme provides flexible repayment options,
with a repayment period of up to 8 years and a morato- Process for Availing Guarantee Cover
rium of up to 2 years on principal payments. This gives busi-
Financial institutions eligible under the scheme, including
nesses ample time to establish themselves before beginning
Scheduled Commercial Banks (SCBs)/AIFIs/NBFCs, must reg-
repayment.
ister with NCGTC to become Member Lending Institutions
(MLIs). Once registered, they can submit loan applications
To further ease financial strain, MSMEs need to make an
for MSMEs through the NCGTC portal.
upfront contribution of 5% of the loan amount (up to Rs. 5
crore). There is no guarantee fee for the first year, and from
The guarantee cover issuance involves several key
the second year onwards, a minimal annual guarantee fee
is charged-1.5% for the first three years and 1% thereafter. steps:
Loan Sanctioning: MLIs upload loan details on the portal
How Banks/ All India Financial Institu- and generate a demand for upfront contribution (5% of the
loan sanctioned minus collateral value).
tions/ NBFCs Benefit from the Scheme
While MSMEs gain better access to credit, banks/AIFIs/ Non- Guarantee Fee Payment: Guarantee Fee on loan under the
Banking Financial Companies (NBFCs) also stand to benefit: Scheme shall be Nil during the year of sanction and The
Reduced Credit Risk: The 60% government guarantee re- annual guarantee fee (1.5% for next three years, then 1%)
duces the lender's exposure to risk, encouraging them to must be paid within 30 days of loan disbursement.
approve loans more easily.
Example to calculate the Upfront contribution/
Higher Loan Disbursements: Banks can now lend larger
Annual Guarantee Fee under the scheme
amounts to MSMEs, helping them achieve their priority
Loan Sanctioned (S) - Rs.100 lakh
sector lending targets.
1 st tranche of loan disbursed in sanction year or next year
Well-Defined Claim Process: If an MSME loan becomes a (D1)- Rs.30 lakh
Non-Performing Asset (NPA), lenders can invoke the guar- 2nd tranche of loan disbursed next year on 01.06.2025 (D2)-
antee after Lock in period of two years from the date of Rs.20 lakh
commencement of guarantee cover, ensuring timely risk 3rd tranche of loan disbursed next year on 01.09.2025 (D2)-
mitigation. Rs.50 lakh

BANKING FINANCE | MAY | 2025 | 23