Credit guarantee cover
Credit Guarantee Fund scheme relieves the borrowers of providing any collateral security. It is not a subsidy component

Even as banks have introduced various measures to delight customers, the behaviour of some of the customers nowadays resembles a frightening cat for a bank official sitting at the counter. Today, most of the customers are revolting, dictating and making the bank staff to dance to their tunes. Such types of customers are not ready to listen and they want only to be listened even being illogical and at times resorting to immoral tactics to pressurize the bank staff. 
Some time back, a small group of around a dozen of artisans who were sponsored by a government agency for financial assistance under some self employment schemes created panic at a bank branch. The branch officials after verification of the cases had found just nine beneficiaries eligible for the loan under the scheme. The most astonishing fact was that most of them were not artisans and a motor mechanic was also sponsored by the government agency to get loan facility under the artisans’ scheme!  
An interesting development was that the sponsored artisans had formed a union to press for early release of facility in their favour without any ‘hiccups’. Basically, they were told by the sponsoring agency that their loans were 80 per cent covered under the credit guarantee fund scheme and the banks should have no hesitation to give them the loans. The sponsoring agency didn’t elaborate the concept of the scheme to them and it was here the confusion started as they got the impression that their loan facility is loaded with subsidy of around 80 per cent. 
The branch was ready to release the working capital and term loan facility in favour of the genuine artisans sponsored by the agency, but the group was pressing hard to release the facility along with ‘subsidy component of 80%’ in favour of all the persons sponsored by the agency.  The argument between the bank officials and the artisans continued till it was made clear to them that the credit fund guarantee scheme is not a subsidy scheme and eligibility criteria for availing benefits under the scheme were also made them clear. But not before ugly scenes were witnessed at the bank branch for days together. 
In the backdrop of the above mentioned situation, let’s discuss the Credit Guarantee Fund Scheme? What is this scheme? Is this a scheme carrying subsidy component? Credit Guarantee Fund Trust for Small Industries (CGTSI), a Trust set up jointly by the Government of India and Small Industries Development Bank of India (SIDBI) is administering the Credit Guarantee Fund Scheme (CGFS) launched by Government of India to cover credit facilities extended to small scale industries by the banks. The guarantee cover under the CGFS is available for credit facilities extended by the banks, in respect of a single eligible borrower, not exceeding Rs.50 lakh by way of term loan and/or working capital facilities on or after entering into an agreement with the Trust, to the small scale industrial units including information technology and software industries, without any collateral security and/or third party guarantees.  It is also worth mentioning that the artisans/ manufacturers/ producers engaged in manufacturing activities in handicrafts sector are also covered under Credit Guarantee Scheme. 
So in lieu of this fact, the CGFS cover was extended with a view to alleviating the problem of collateral security and impediment to flow of credit to small and tiny industries sector. It is worth mentioning that the first generation of entrepreneurs faced difficulties in accessing bank credit because of their inability to provide adequate collateral security for loans. The CGFS cover absolves  them of collateral security while seeking release of loan in their favour.
The credit guarantee cover is given 80% of the amount in default for loans to micro enterprises upto Rs. 5 lakh; and loans to micro and small enterprises operated and/ or owned by women. Besides, the coverage of the Scheme too stands extended to all new and existing Micro and Small Enterprises (both in the Manufacturing Sector as well as Service Sector).
The banks or any other eligible lending institutions availing guarantee from the Trust have to pay one time guarantee fee of 2.5% of the credit facility sanctioned and the service charges of 1% per annum on the outstanding loan amount as on 31st March each year. The guarantee cover commences from the date of payment of guarantee fee and shall run through the agreed tenure of the term credit in respect of term credit/composite credit.
The banks can invoke the guarantee if loan facility covered under the scheme has been recalled and the recovery proceedings have been initiated under due process of law. However, as envisaged in the terms and conditions of the scheme, the lock-in period should be 24 months from either the date of last disbursement of the loan to the borrower or the date of payment of the guarantee fee in respect of credit facility to the borrower, whichever is later, has elapsed. The amount due and payable to the bank in respect of the credit facility has not been paid and the dues have been classified by the bank as non performing assets.
So the CGF scheme is not a subsidy, but a credit guarantee cover, which relieves the borrowers of providing any collateral security. In case the borrower fails to repay the loan amount, 80 per cent of the outstanding loan amount shall be liquidated through credit guarantee fund scheme.
Meanwhile, adequate and timely financial support is precursor to the success of any economic activity. Credit flow from the formal system (banks and financial institutions) to small borrowers especially persons of small means like artisans, handloom weavers, handicraftsmen, etc has not been satisfactory so far.
Handloom and handicraft sectors have enormous potential to provide productive employment to large number of artisans, craftsmen and weavers. But these sectors comprise a major industrial activity in the state, as they support over five lacs people with an annual turnover of more than Rs.2000 crores. The poor financial resources have been responsible for the plight of artisan community in Kashmir and they have never been the real beneficiaries of the trade.
There is urgent need to carve out ways and means where the skill of the artisans, craftsmen and weavers is elevated and their looms and processes upgraded taking into account the environmental needs and the international market demand. Traditional knowledge has to be integrated with technology. At the same time banks operating in the State a responsibility to extend hassle free credit facilities to the artisans community at least through the schemes already put in place for them.
Notably, J&K Bank in its endeavour to promote and preserve traditional arts and crafts of the state has already devised several schemes aimed at the financial needs of the artisan community. The schemes provide easy and soft credit to craftsmen engaged in the trade and helps them to set up their own ventures. Keeping in view the specific production cycle associated with the trade, the loan comprises of a term loan and working capital components.
And finally, the situation which surfaced in the name of credit guarantee fund scheme at a bank branch mentioned above suggests that financial literacy should be prioritized. The sponsoring agencies, banks and financial institutions should educate the customers about various schemes. They must conduct regular camps and make best use of communication channels popular among the people to apprise the beneficiaries about the features of these schemes.

(The views are of the author & not the institution he works for.  Feedback:  sajjadbazaz@greaterkashmir.com)

Lastupdate on : Sun, 1 May 2011 21:30:00 Makkah time
Lastupdate on : Sun, 1 May 2011 18:30:00 GMT
Lastupdate on : Mon, 2 May 2011 00:00:00 IST