Credit Guarantee Scheme: Benefits, Eligibility & Application Process

Unlock new growth opportunities for your Micro, Small and Medium Enterprise with the Credit Guarantee Scheme. By removing the barrier of collateral, this empowering initiative helps you secure essential funding with confidence. Discover how it fuels entrepreneurship and accelerates business success across the vibrant economy of India.

What is the Credit Guarantee Scheme?

The Credit Guarantee Scheme is a government-backed initiative that empowers Micro, Small and Medium Enterprise (MSME) owners to achieve business growth through collateral-free loans. Formally known as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), this scheme, introduced in 2000 by the Ministry of MSME and SIDBI, aims to make credit accessible for every aspiring entrepreneur in India.

Its core objective is to extend credit guarantees to banks and financial institutions that offer term loans and working capital loans to MSMEs. The latest budget update (2025) has doubled the maximum guarantee from ₹5 crore to ₹10 crore and offers enhanced benefits for startups and exporters. This scheme enables MSMEs to access financial assistance for machinery, equipment and infrastructure without requiring collateral.

How Does the CGTMSE Loan Scheme Work?

The CGTMSE loan scheme simplifies the process of getting financial aid for MSMEs. Here is how it works:

1. Business Setup: Establish a business entity (proprietorship, LLP, company) with all necessary registrations.
2. Loan Application: Submit a detailed business plan to a Member Lending Institution (MLI) for loan approval.
3. Loan Sanction: Once the bank evaluates and sanctions the loan, it applies to CGTMSE for a guarantee cover.
4. Guarantee Cover Issuance: Upon approval, CGTMSE issues the guarantee by charging a one-time fee and an annual service charge.
5. Disbursal: The lender disburses the loan to the borrower. Repayment terms are as per the agreement.

Also Read: What is the CLSS Scheme?

Role of Banks and Financial Institutions

Banks, NBFCs and other approved financial institutions act as intermediaries between the borrower and CGTMSE. Their role includes:

• Evaluating the loan application
• Assessing business viability
• Sanctioning the loan
• Applying for the CGTMSE guarantee on behalf of the borrower
• Managing disbursal and repayment

These institutions benefit from reduced lending risk while supporting MSME growth.

Eligibility Criteria for CGTMSE Scheme

To qualify for the CGTMSE scheme, both the borrower and the lender must meet specific criteria:

For Borrowers:

• Must be an MSME or startup recognised by DPIIT
• Should have a stable revenue stream (audited financials for 12 months)
• Should not be in default to any lender
• Should not be classified as NPA
• Eligibility must be certified by the MLI

For Lenders:

• Scheduled Commercial Banks
• NBFCs with a BBB+ rating and a net worth of ₹100 crore
• SEBI-registered Alternative Investment Funds (AIFs)

Also Read: What is the PM SVANidhi Scheme?

Coverage and Guarantee Limits Under CGTMSE

Maximum guarantee cover now extends up to ₹10 crore for standard cases and ₹20 crore for startups and exporters.

Benefits of the CGTMSE Scheme for MSMEs

• No need for external collateral or third-party guarantee
• Access to term loans and working capital
• Lower default risk for lenders
• Encourages credit flow to small businesses
• Supports manufacturing, service and retail sectors
• Suitable for startups and growth-stage ventures

CGTMSE Scheme Subsidy and Fees Explained

The scheme is self-financing. Borrowers pay:

• Upfront Guarantee Fee: 0.37% to 1.35% depending on the loan amount
• Annual Service Fee: Calculated on outstanding balance
• Subsidies: Women, SC/ST entrepreneurs and those in NER or ICDD regions receive discounted rates.

How to Apply for a CGTMSE Loan?

1. Establish Your Business: Register your business and obtain necessary licenses.
2. Prepare Business Plan: Include market analysis, promoter credentials and projections.
3. Approach MLI: Submit the plan and loan application.
4. Loan Sanction: MLI evaluates and approves the loan.
5. Apply for Guarantee: MLI files an application with CGTMSE.
6. Pay Fees: Borrower pays guarantee and service fees.
7. Loan Disbursal: The Amount is released by the lender.

Also Read: PM Kusum Scheme: Solar Yojana for Farmers & Entrepreneurs

Documents Required for CGTMSE Loan Application

• Business registration documents
• Business plan and project report
• Promoter KYC
• ITR and financial statements
• Bank statements
• GST and license proofs (if applicable)

Common Challenges and Tips for Successful CGTMSE Loan Approval

Challenges:

• Incomplete documentation
• Weak business model
• Low creditworthiness
• Misalignment with lender expectations

Tips:

• Maintain audited financials
• Hire a professional to prepare your project report
• Choose a lender familiar with CGTMSE
• Keep all compliance documents ready

Impact of Credit Guarantee Scheme on MSME Growth in India

The CGTMSE scheme has significantly improved credit access for small businesses. In FY2023, over 11 lakh guarantees were issued. The enhanced cap in 2025 boosts credit availability for modernisation and expansion. Many MSMEs have utilised the scheme to invest in machinery, upgrade technology, and scale their operations, thereby helping the Indian manufacturing sector to become more competitive.

Conclusion

The Credit Guarantee Scheme is a pivotal initiative strengthening the MSME sector of India by fostering growth, innovation and self-reliance. It offers enhanced guarantee limits up to ₹10 crore, enabling entrepreneurs to access collateral-free loans with simplified procedures. This reliable credit support empowers MSMEs to modernise operations, invest in technology and scale competitively in domestic and global markets. By reducing financial barriers, the scheme fosters entrepreneurial confidence and makes a significant contribution to the sustainable growth of the MSME ecosystem in India.

Apply Now for a MSME Business Loan

FAQs

Q.1. What is the maximum loan amount covered under the Credit Guarantee Scheme?

A. Under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, the maximum loan amount covered is up to ₹5 crore. The extent of guarantee coverage varies based on the borrower type and loan size:

• Up to ₹2 crore: CGTMSE provides up to 75% (and in some cases, 85% - 90%) of the credit facility as a guarantee.
• ₹2 crore to ₹5 crore: The guarantee is limited to ₹1.5 crore for loans beyond ₹2 crore.

Q.2. Can startups apply under the CGTMSE loan scheme?

A. Yes, startups and first-generation entrepreneurs are eligible to apply, provided:

• The business is classified under the Micro or Small Enterprise (MSE) category.
• The loan is fund-based or non-fund-based, including working capital and term loan.
• The borrower is not a defaulter and meets bank eligibility criteria.

Startups must also present a viable business model and financial projections to be considered by the lending institution.

Q.3. Are Mudra loans covered under CGTMSE?

A. Yes, select Mudra loans (especially under the Tarun category) may be eligible for a credit guarantee under CGTMSE. However:

• These are typically routed through Micro Finance Institutions (MFIs), NBFCs and banks.
• Coverage depends on the arrangement of the lending institution with CGTMSE.

For micro-businesses with loans up to ₹10 lakh, Mudra loans offer a collateral-free solution, often backed separately by NCGTC (National Credit Guarantee Trustee Company).

Q.4. How long does it typically take to get a CGTMSE-guaranteed loan approval?

A. Approval timelines can vary by lender, but generally:

• It takes around 2 to 4 weeks from the date of submission of all required documents.
• Some banks may expedite processing for priority sectors or women entrepreneurs.

The CGTMSE coverage process is initiated after loan sanction by the bank, not before. Ensure all documents are submitted correctly to avoid delays.

Q.5. Can CGTMSE loans be used for both term loans and working capital?

A. Absolutely. The CGTMSE scheme supports:

• Term loans – used for buying machinery, equipment or setting up infrastructure.
• Working capital loans – for day-to-day operational expenses.

The combined limit of term and working capital loans is eligible under the credit guarantee, as long as it is within the ₹5 crore cap.

Q.6. Is collateral mandatory if I apply under the credit guarantee scheme?

A. No, that is the primary benefit of CGTMSE. Collateral security is not required if the bank is availing of guarantee cover under the scheme. However:

• Banks may still ask for the primary security of assets created using the loan.
• In certain cases, personal guarantees from promoters may be requested, especially for higher loan amounts.

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