Annual Policy Statement for the Year 2010-11 – IV – Credit Delivery and Financial Inclusion
I wish I had the time, to analyze the Annual Policy Statement for the Year 2010-11 in detail. But time and the vast subject the Statement encompasses does not permit me to do so.
So, I will try to highlights those points, which touch my heart.
Reserve Bank of India, in it’s Annual Policy 2010-2011 has advised Banks to raise the ceiling limit for Collateral Free Loans for Micro and Small Enterprises from the present Rs.5lacs to Rs10 lacs.
IV. Credit Delivery and Financial Inclusion
Credit Flow to the MSE Sector
Credit Guarantee Scheme for MSEs
Paragraph 73. Following the recommendations of the Working Group (Chairman: Shri V. K. Sharma) on credit guarantee scheme of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGFTMSE), it is proposed:
- to mandate banks not to insist on collateral security in case of loans up to Rs.10 lakh as against the present limit of Rs.5 lakh extended to all units of the micro and small enterprises (MSEs) sector.
What is CGFTMSE ?
As per the Credit Guarantee Fund Trust for Micro and Small Enterprises, website, the brief description is extracted here
Availability of bank credit without the hassles of collaterals / third party guarantees would be a major source of support to the first generation entrepreneurs to realise their dream of setting up a unit of their own Micro and Small Enterprise (MSE). Keeping this objective in view, Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS) so as to strengthen credit delivery system and facilitate flow of credit to the MSE sector. To operationalise the scheme, Government of India and SIDBI set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
- The main objective is that the lender should give importance to project viability and secure the credit facility purely on the primary security of the assets financed.
- The other objective is that the lender availing guarantee facility should endeavor to give composite credit to the borrowers so that the borrowers obtain both term loan and working capital facilities from a single agency.
- The Credit Guarantee scheme (CGS) seeks to reassure the lender that, in the event of a MSE unit, which availed collateral free credit facilities, fails to discharge its liabilities to the lender, the Guarantee Trust would make good the loss incurred by the lender up to 75 / 80/ 85 per cent of the credit facility.
Well in my opinion, this is a good sign to encourage small players with innovative ideas, to set up their own business, without the need for any additional security.
For a business to be flourishing, lots of factors have to come together and play a role.
Hence, it cannot be assumed that all businesses have to boom.
But, I am worried about willful defaulters rather than genuine defaulters.
The less the number of defaulters in this Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the more number of entrepreneurs the Fund can support.
Support to more entrepreneurs means more jobs for the country.
Q: So what could be a via media, to minimize willful defaults?
Ans: Well the promoters and the directors should be checked for the credit worthiness by requesting their CIBIL Report.
Loans should be given only to those promoters and directors who have a clean CIBIL Record.
Now, the question is : Is too much reliance being placed on CIBIL reports. Well till there are other alternatives, I feel the CIBIL Reports are the best option.