Guidelines for Credit Guarantee Scheme for Subordinate Debt

Ashish M. Shaji

31 Aug, 2020

The Ministry of Micro, Small, and Medium Enterprises has introduced the Distressed Asset Fund to provide emergency credit support to MSMEs impacted by Covid-19. In this, another funding scheme of the Credit Guarantee Scheme for Subordinate Debt (CGSSD) has been launched to assist the distressed MSME.

What is Distressed Asset Fund- Subordinated Debt for stressed MSMEs?

This scheme has been framed by the Ministry of MSME under which credit facility shall be provided to the promoters of the stressed MSMEs by Scheduled Commercial Banks for infusing the same as equity/quasi-equity/sub-debt in the unit.

What is the credit guarantee scheme for Subordinate debt?

Credit guarantee fund trust for Micro and Small Enterprises shall operate the CGSSD scheme. It provides a guarantee coverage to Member Lending Institutions for the credit facility extended to the eligible MSMEs under the scheme.

The main objective of the CGSSD scheme is to offer credit facilities through lending institutions to the promoters of stressed MSMEs.

What is the maximum sub-debt amount eligible under this scheme?

Under the CGSSD scheme, the Promoter(s) of the MSME unit would be given credit facility equal to 15% of their stake in the MSME entity (equity plus debt) or 75 lakh rupees whichever is lower as per the last audited balance sheet. 

What is the duration under the scheme?

The scheme shall apply to all credit facilities sanctioned under the credit guarantee scheme for Subordinate debt for a maximum period of ten years from the guarantee availment date or 31^st March 2021, whichever is earlier or till an amount of 20000 crore rupees of guarantee amount is approved.

Who are eligible borrowers under the Credit Guarantee scheme for subordinate debt?

The credit guarantee scheme for Subordinate debt is applicable for those MSMEs whose accounts have been standard as on 31^st March 2018 and have been in regular process operations as standard accounts or as Non-Performing Assets accounts during the FY-2018-19 and FY- 2019-20.

The personal loan shall be provided to the promoters of the MSME unit. The scheme is valid for MSME units, that are stressed viz. SMA-2 and NPA account as on 30^th April 2020 that are eligible for restructuring according to the RBI guidelines on the books of the Lending Institutions.

It may be noted that fraud or wilful defaulter accounts will not be considered under the proposed scheme.

Which are the MSMEs constitutions included in the scheme?

 The following type of MSMEs constitution is included in the scheme:

• MSME units such as individuals/Proprietorship;
• Limited Liability Partnership (LLP);
• Partnership;
• Private Limited Company; and
• Or Registered Company.

Loan amount eligible under the Guarantee Coverage

It may be noted that the guarantee coverage shall be provided to the eligible borrower for the credit facilities extended under the scheme. The promoter of the MSME unit shall be provided credit equal to 15% of the stake or 75 lakh rupees, whichever is lower. The financial assistance that is provided is to be operated as a separate loan account, and the promoter is required to infuse the sub-debt/loan amount as promoters’ contribution in the form of equity into the MSME entity. 

Any guarantee approved under the scheme shall be over and above existing loan or guarantee sanctioned by the trust.

In the case where a borrower has existing limits with more than one lender, the scheme can be availed by the borrower through one lender only.  A declaration from the borrower about its other banking arrangements and that it has not availed funding from the other lenders under the scheme to be obtained by the lending Member Lending Institutions.

Member Lending Institutions shall carry out the own due diligence to assess the viability and requirement of the sub-debt facility in respect of the restructuring of the stressed MSME units.

The interest rate of credit under the scheme

The interest rate on credit guarantee scheme for subordinate debt shall be capped as under:

• According to the guidelines of the Reserve Bank issued on 4^th September 2019 and 26 February 2020, all loans to MSMEs must be benchmarked to one of the external benchmark rates.
• Banks can decide the spread over the external benchmark as per the approved policies. Therefore, the loans provided under the scheme must adhere to RBI guidelines^[1] and linked to the external benchmark rates.

The tenor of credit under the scheme

• The tenor of the sub-debt facility provided under the scheme will be according to the repayment schedule defined by the lender, subject to a maximum tenor of ten years from the guarantee availment date or 31^st March 2021 whichever is earlier.
• The maximum tenor for repayment shall be ten years, and there will be a moratorium of seven years (maximum) on the payment of the principal. The interest will be paid only until the 7^th year. 
• The interest on the sub-debt under the CGSSD scheme shall be required to be serviced monthly, the principal shall be repaid within a maximum of three years after the completion of the moratorium.
• Pre-payment of loan is allowed at no additional charge or penalty to the borrower.

Conclusion

Read our article:Emergency Credit Line Guarantee Scheme