Banks receive incentives for advances to MSEs in the form of the credit guarantee cover of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and also the benefit of zero risk weight for capital adequacy purpose for the portion of the loan guaranteed by the CGTMSE.
The cover provided by CGTMSE helps banks to protect risk arising out of default as the loans are insured by the guarantee fund trust.
To provide bank credit at competitive rates to MSE Borrowers, Reserve Bank of India, vide Notification No RBI/2013-14/564 DBOD.Dir.BC.No.106/13.03.00/2013-14, has advised banks to appropriately price the loans after taking into consideration the benefits to the banks on account of the above incentives.
However, banks should note that such differential rate of interest is not below the Base Rate of the bank.
Micro and Small Enterprises (MSEs)– Definition of Micro, Small and Medium Enterprise Manufacturing and Service Segments.
|Manufacturing Sector||Services Sector|
|Micro Enterprise||The investment in Plant and machinery ( Original Cost) does not exceed Rs 25 lakhs||The investment in Equipment does not exceed Rs 10 lakhs|
|Small Enterprise||The investment in Plant and machinery ( Original Cost)is more than Rs 25 lakhs but does not exceed Rs 500 lakhs||The investment in Equipment is more than 10 lakhs but does not exceed Rs 200 lakhs|
|Medium Enterprise||The investment in Plant and machinery ( Original Cost) is more than 500 lakhs but does not exceed Rs 1000 lakhs||The investment in Equipment is more than Rs 200 lakhs but does not exceed Rs 500 lakhs|
CGTMSE covers Any collateral / third party guarantee free credit facility (both fund as well as non fund based) extended by eligible institutions, to new as well as existing Micro and Small Enterprise, including Service Enterprises, with a maximum credit cap of Rs.100 lakh (Rupees Hundred lakh only).
CGTMSE takes two types of fees i.e Guarantee Fee and Annual Service Fee. It is left to the credit institutions to pass the incidence of Guarantee Fee and Annual Service Fee to the borrower or alternatively they may decide to bear it themselves.