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Lot of misinformation is being circulated about the proposed Rs. 3 lakh crores collateral free, govt guaranteed loans to MSMEs.
Please read this small thread to know lesser discussed facts.
First of all collateral free govt guaranteed loans are not new.
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#NirmalaSitharaman
Please read this small thread to know lesser discussed facts.
First of all collateral free govt guaranteed loans are not new.
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#NirmalaSitharaman
Govt has already made few fund trusts to serve this purpose.
Most prominent and well known is CGTMSE.
Other lesser known but very important such trust is NCGTC.
Now since FM have said CGTMSE shall cover the new proposed loans, we shall only talk about it.
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Most prominent and well known is CGTMSE.
Other lesser known but very important such trust is NCGTC.
Now since FM have said CGTMSE shall cover the new proposed loans, we shall only talk about it.
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CGTMSE covers 50 to 85% of bank's exposure to MSMEs (lower the loan amount, more portion is covered).
Earlier CGTMSE coverage was available with an upper cap of Rs. 2 crores per borrower, now this limit shall be enhanced.
It covers both fund based and non fund exposures.
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Earlier CGTMSE coverage was available with an upper cap of Rs. 2 crores per borrower, now this limit shall be enhanced.
It covers both fund based and non fund exposures.
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Now the question arises that shall banks lend open-heartedly to MSMEs after this scheme?
The simple answer would have been no, but given the type of command govt has over the PSBs, the answer is, 'this scheme shall be reasonably successful'.
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The simple answer would have been no, but given the type of command govt has over the PSBs, the answer is, 'this scheme shall be reasonably successful'.
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Now another very important question arises, why banks shall not take advantage of this scheme and lend freely?
To find the answer, you must understand this:
In the loans of higher ticket size, say above crore, only 50% of exposure is covered (guaranteed) under this cover.
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To find the answer, you must understand this:
In the loans of higher ticket size, say above crore, only 50% of exposure is covered (guaranteed) under this cover.
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For the remaining 50% portion banks have to make higher provisions, so it 'consumes' bank's capital (very scarce at this time).
Almost in every case, since there is practically no tangible security charged with bank, borrowers don't make whole-hearted efforts to pay.
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Almost in every case, since there is practically no tangible security charged with bank, borrowers don't make whole-hearted efforts to pay.
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Hence banks are often less than enthusiastic in covering big ticket sized loan accounts under this cover.
There is one more thing. This coverage comes with a price tag.
Covering your loan under this cover shall cost you around 2.5 to 3% +GST of the loan amount, per annum.
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There is one more thing. This coverage comes with a price tag.
Covering your loan under this cover shall cost you around 2.5 to 3% +GST of the loan amount, per annum.
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This fees, say 3% is on the top of around 10% interest, 1% +GST processing fees, .1% +GST documentation charges, .2% +GST inspection charges.
So the effective rate of interest a MSME unit end up paying is in the northwards of 14%.
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So the effective rate of interest a MSME unit end up paying is in the northwards of 14%.
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Needless to say,sometimes this coverage end up making projects unviable.
Now say a businessman comes to bank to cover a loan of Rs. 20 crores under this scheme,he'll have to pay anywhere between Rs. 55 to 70 lakhs (including GST) upfront as CGTMSE fees.
Ease of business?
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Now say a businessman comes to bank to cover a loan of Rs. 20 crores under this scheme,he'll have to pay anywhere between Rs. 55 to 70 lakhs (including GST) upfront as CGTMSE fees.
Ease of business?
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