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Credit guarantee - extent of cover, invocation, claim etc.

1. When will the guarantee cover commence for the eligible credit facility?

The guarantee cover will commence from the date on which guarantee fee proceeds are credited to bank account of the Trust.

2. How long the guarantee cover is available for credit facilities extended to a particular borrower?

Guarantee will commence from guarantee start date and shall run through the agreed tenure of the term loan / composite loans. Where working capital facilities alone are extended to eligible borrowers, it would be for a period of 5 years or block of 5 years on renewal of the guarantee cover, provided MLI pays the Annual Service Fee due as on March 31, latest by within 60 days from the date of demand by CGTMSE.

3. Whether the interest on term loan and other charges can also be guaranteed by the Trust?

In case of default by the borrower subject to overall guarantee cap amount, the liability of the Trust in respect of credit facility shall be as follows: -
i. Term Loan: - Defaulted amount (inclusive of 1 Quarter interest)
ii. Working capital facility: - Outstanding working capital advance (inclusive of interest up to the date of NPA).
Other charges such as penal interest, commitment charge, service charge or any other levies / expenses shall not qualify for the guarantee cover.

4. Whether the credit facility for rehabilitation / nursing of the sick unit can also be eligible for guarantee under the Scheme?

The eligible borrower unit which has been covered under the Scheme and subsequently becomes sick due to factors beyond the control of the management, the assistance / credit for rehabilitation extended by the lender could also be covered under the Scheme provided the overall assistance is within the credit cap of 200 lakh, for such extended period of guarantee and on such terms as may be decided by the Trust.

5. What is the tenure of the cover for credit relating to working capital?

The tenure for coverage of working capital facilities is 5 years, where working capital alone is covered under the scheme. In case term credit and working capital both are covered under the scheme, the tenure relating to working capital facility would match the normal repayment period of term credit. The reason for keeping a limit of 5 years wherever working capital alone covered are that the period for which the same are extended by the lending institutions are not time bound. The same are reviewed periodically for increase/ decrease in the limit sanctioned, and are expected to continue for a time frame much longer than 5 years. CGTMSE welcomes any renewal of guarantee cover beyond 5 years on a payment of applicable guarantee fee.

6. Whether the guarantee will continue to be available in respect of a particular borrower unit if there is change in management of that borrower during the period the guarantee is in force?

If the new promoters / management meets / satisfy the norms of the eligible borrower viz. maximum credit availed and outstanding, MSE status etc., and continues to perform the existing activities of borrower or undertakes the new activities which otherwise are eligible under the Scheme for guarantee then the lender can continue such borrower with existing liabilities under the scheme of guarantee. However, if the new promoter / management do not satisfy any of the norms of the Scheme, the guarantee in respect of the credit facility shall be deemed to be terminated from the date of said transfer or assignment.

7. Under what circumstances the guarantee cover obtained by the lender in respect of particular borrower will lapse?

The guarantee cover given by the Trust to the lender in respect of credit facility to a particular borrower will lapse if
i. It is subsequently brought to the knowledge of the Trust that the lender has obtained collateral / third party guarantee from the borrower while sanctioning the particular credit facility which has been covered under the guarantee,however, MLIs will be allowed to obtain collateral security for a part of the credit facility, whereas the remaining part of the credit facility, up to a maximum of ₹ 200 lakh, can be covered under Credit Guarantee Scheme of CGTMSE.
ii. It is subsequently gathered that the lender has advanced second / subsequent credit facility to the borrower with collateral / third party guarantee and extended the scope of collateral / third party guarantee to the existing credit facility for which guarantee cover has been obtained from the Trust.
iii. Annual service charge is not paid to the Trust by the specified period or such extended time limit as may be granted by the Trust.
iv. The tenure of guarantee cover has expired.

8. When can the lender invoke the guarantee given by the Trust in respect of credit facility advanced by it to the eligible borrower?

The lender shall prefer a claim on the defaulted account on recall of loan and initiation of recovery proceedings under due process of Law. The lender can, however, invoke the guarantee given by the Trust only after the lock-in period of 18 months either from the date of last disbursement of credit to the borrower or from the date of the guarantee cover coming into force in respect of the particular credit facility, whichever is later.

9. How the claim of lender will be settled by the Trust in respect of defaulting account?

After satisfying itself about the procedural aspects met by the lender, regarding lodgement / preferment of claim for guarantee, the Trust will honour 75% of the guaranteed portion of the amount in default, subject to maximum of 50% / 75% / 80%/85% of the amount in default. The balance 25% shall be paid on conclusion of the recovery proceedings.For credit facilities sanctioned by Member Lending Institutions (MLIs) on or after 01/01/2013, the balance 25% shall be paid on conclusion of the recovery proceedings or after three years of obtention of decree of recovery, which is earlier. Please refer Circular No.135/2017-18 for more details.

10. Whether guarantee cover is available to the second term loan sanctioned after 2/3 years of the first term loan? Whether the cash credit will continue to be covered under the scheme up to repayment of the 2nd term loan?

Guarantee cover is available for the second term loan provided the aggregate credit does not exceed 200 lakh. Where working capital is sanctioned along with the term loan facility, the tenure of such working capital facility shall be co-terminus with that of term loan facility and shall run concurrently with the scheduled repayment period of the term loan facility. Subsequent to the repayment of the term loan along with which working capital was sanctioned, the guarantee cover in respect of working capital can be renewed by paying applicable guarantee fee on the sanctioned working capital facility or the renewal of working capital may also be clubbed with the second term loan facility so that both are sanctioned together, thus getting guarantee cover for both the facilities for a period equal to the repayment period of second term loan, on payment of guarantee fee on the sanctioned (term loan + working capital) account.

11. Whether the responsibility to recover the defaulted credit is taken over by the Trust after the settlement of claim (issuance of 1st Installment of claim) in respect of particular borrower account?

No, the lender continues to remain responsible to take all efforts in recovery of credit advanced to the borrower who had defaulted, even after the initial settlement of the claim by the Trust. However such recovery should be remittted by the lender (after adjusting towards legal expenses) to CGTMSE without delay.

12. Where the credit facilities are covered under ECGC, is it possible to avail guarantee cover to the extent not covered by ECGC under Credit Guarantee Scheme?

Any credit facility in respect of which risks are additionally covered by Government or by any general insurer or any other person or association of persons carrying on the business of insurance, guarantee or indemnity, to the extent they are so covered is not eligible for credit guarantee cover of the Trust.

13. Issue of notice under Lok Adalat is sufficient for invoking the guarantee and getting the first installment?

Yes, for the purpose of the scheme, issue of notice under Lok Adalat is sufficient to prove the legal proceedings have initiated.

14. Issuing notices to the defaulted units under SARFAESI Act 2002 is sufficient for invoking guarantee under the scheme?

No, mere issuance of recall notice under SARFAESI Act cannot be construed as initiation of legal proceedings for purpose of preferment of claim under CGS. Lending institution should take further action as contained in Section 13 (4) of the above Act.

15. What is the familiar ground upon which claims from MLIs are rejected by the trust?

i. Legal proceedings not initiated, or just a notice under the SARFAESI act issued but charge on primary security is not taken.
ii. Guarantee cover was not in force i.e. service fee was not paid for one particular period.
iii. Account was doubtful of repayment when the cover was taken and it was obvious from the conduct of the account that it will turn NPA subsequently i.e. applied for guarantee cover when the asset became stressed.
iv. Claim application not submitted within the due date for claim lodgement.
v. Legal action against the borrower/ default unit not initiated or is initiated after the due date of claim lodgement.

16. Whether accounts classified as fraud / willful defaulter are eligible for claim settlement?