CGTSI/(44)/2081

January 20, 2005

All Member Lending Institutions

Circular No. 21 /2004-05

Dear Sir / Madam,

Modifications in the Credit Guarantee Fund Scheme for Small Industries (CGS)

CGTSI has been receiving suggestions from its stakeholders, more particularly from its MLIs, to cover non-fund based working credit facilities and interest on the term loan when it becomes an NPA under the CGS. MLIs have also been suggesting certain modifications / changes in some of the provisions of the Scheme. With a view to making the Scheme more user-friendly and acceptable to the MLIs, CGTSI has brought about certain modifications in the Scheme, which are given in the Annexure .

Please feel free to get in touch with us in case any further clarifications are required.

Thanking you,

 

Yours faithfully,

Sd/-

(S N Sadhwani )

Deputy General Manager

Annexure

Circular No. 21 /2004-05

Modifications in the Credit Guarantee Fund Scheme for Small Industries (CGS)

The modifications brought in the Credit Guarantee Scheme are given below:

1) Extending additional term loan / working credit facilities to the borrowers already covered under the Scheme upto the maximum extent of Rs 25 lakh.

Existing Provision:

Under Clause 4, Chapter II of the Scheme, there is a ceiling of Rs. 25 lakh for providing guarantee against the credit facilities extended by the eligible lending institutions to a single eligible borrower. The maximum guarantee cover available per eligible borrower shall not exceed 75% of the amount in default in respect of the credit facility extended by the lending institution, subject to maximum of Rs. 18.75 lakh. In keeping with the spirit of the Scheme, CGTSI has been advising its MLIs not to seek any collateral security and / or Third Party Guarantee (TPG) while extending additional credit facility to those borrowers in respect of whom the credit facility of Rs. 25 lakh has already been covered under CGS. CGTSI expects the MLIs to offer additional need-based credit to such borrowers based on their track record and the risk perception, without insisting on collateral security and / or TPG.

Modified provision:

In respect of eligible borrowers already covered under the Scheme to the maximum extent of Rs.25 lakh, MLIs may now extend additional term loans / enhanced working capital facilities to such borrowing units by taking collateral security and / or TPG, if considered necessary, keeping in view the risk perception. The collateral security / TPG would, however, be restricted to the additional loan / credit facility only. In such eventuality, the guarantee cover already extended by CGTSI to the MLIs against such borrowing units would continue to remain in force through its normal tenor.

It is further clarified that in case of eligible borrowers already covered under the Scheme upto the maximum credit ceiling of Rs. 25 lakh and to whom additional credit facilities are extended by the MLIs, by taking collateral security and / or TPG, the Clause 11(ii) of the Scheme as reproduced below will continue to be applicable in case any payments are made by the borrower to the MLI.

Clause 11(ii) of CGS -

"In the event of a borrower owing several distinct and separate debts to the lending institution and making payments towards any one or more of the same, whether the account towards which the payment is made is covered by the guarantee of the Trust or not, such payments shall, for the purpose of this clause, be deemed to have been appropriated by the lending institution to the debt covered by the guarantee and in respect of which a claim has been preferred and paid, irrespective of the manner of appropriation indicated by such borrower or the manner in which such payments are actually appropriated."

Date of effect of modification: Effective February 01, 2005.

Rationale for the change:

Since, the ceiling of credit (Rs.25 lakh) eligible to be covered under the Scheme may not be sufficient to cover the requirements of units which are growing fast, MLIs have been suggesting that they may be allowed to extend additional credit beyond this ceiling against collateral security and / or TPG. In some instances, MLIs have been reluctant to extend such additional credit facility without collateral security and / or TPG. Also, it has been provided in the Scheme that the individual borrowing units should deal with a single lending institution for all their credit requirements (exception has been made where the borrowing units have been extended term credit assistance by state level institutions / other financial institutions). Hence, the proposed change will help the eligible SSI units in accessing additional funds without hindrance. The above modification would ensure that the additional credit requirements above Rs. 25 lakh of the borrowers already covered in the Scheme would also be met by the MLIs, in future.

2) Inclusion of Non-fund based working capital facilities under CGS within the overall limit of Rs. 25 lakh

Existing Provision:

In terms of Clause 2 (iii), Chapter I of CGS -

" Credit facility " means any financial assistance by way of term loan and / or fund based working capital facilities (cash credit, overdraft, bills purchased or discounted, etc.) extended by the lending institution to the eligible borrower. For the purpose of calculation of guarantee fee, the "credit facility extended" shall mean the amount of financial assistance committed by the lending institution to the borrower, whether disbursed or not. For the purpose of the calculation of annual service fee, the credit extended shall mean the amount outstanding as at March 31, of the relevant year.

Modified provision:

" Credit facility " means any financial assistance by way of term loan and / or fund based and non-fund based working capital facilities (cash credit, overdraft, bills purchased or discounted, bank guarantee, Letter of credit, etc.) extended by the lending institution to the eligible borrower. For the purpose of calculation of guarantee fee, the "credit facility extended" shall mean the amount of financial assistance committed by the lending institution to the borrower, whether disbursed or not. For the purpose of the calculation of service fee, the credit facility extended shall mean the credit facilities (both fund and non-fund based) covered under CGS and for which guarantee fee has been paid, as at March 31, of the relevant year.

Date of effect of modification : Effective February 01, 2

Rationale for the Change

The change is being proposed in view of the persistent demand from the banks and the industry associations to cover non-fund based facilities also. Presently, it is not permissible under the scheme to obtain any collateral security in respect of accounts covered under the Scheme, even for the additional non-fund based credit facilities which are not eligible for coverage under the scheme. Thus, in some instances the banks have been hesitant in extending non-fund based credit facilities to the borrowers already covered under the Scheme. Accordingly, the non-fund based credit facilities, as mentioned above, extended by the MLIs to the eligible borrowers can also be covered under CGS, within the overall ceiling of Rs. 25 lakh per borrowing unit.

3) Inclusion of outstanding interest on term loan under CGS

Existing Provision:

In terms of Clause 2 (i), Chapter I of CGS:

" Amount in Default " means the principal amount outstanding in the account(s) of the borrower in respect of term loan and amount of outstanding working capital facilities (including interest), subject to a maximum of fund based working capital limits sanctioned as on the date of the account becoming NPA or such of the date as may be specified by the Trust, for preferring any claim on the Trust against the guarantee cover.

Modified Provision:

" Amount in Default " means the principal and interest amount outstanding in the account(s) of the borrower in respect of term loan and amount of outstanding working capital facilities (including interest), subject to a maximum of fund based & non-fund based working capital limits sanctioned and guaranteed as on the date of the account becoming NPA, or such of the date as may be specified by CGTSI, for preferring any claim against the guarantee cover.

Date of effect of modification : Applicable in respect of term loan proposals, which are approved under the Scheme effective February 01, 2005.

Rationale for the Change:

As per the extant provisions, only principal outstanding is eligible to be covered under the Scheme in respect of the term loans, as it was assumed that the risk of default in interest (being income for the MLIs) might be borne by the MLIs. This was also provided to leverage the corpus of CGTSI to extend guarantee cover among larger number of SSI borrowers. Many MLIs have sought inclusion of interest outstanding in term loan account under amount in default, in line with the way it is allowed for working capital limit. As long as the overall outstanding in the term loan / working capital account (both principal & interest) remains within the guaranteed loan limit, it has been decided to agree for inclusion of interest in the amount in default for preferment of claim. Accordingly, the accumulated unpaid interest upto the date of borrower account becoming NPA can be included in the amount in default in respect of term loan for preferring any claim on the Trust against the guarantee cover

4) Levying of pro-rata guarantee fee for enhancement in working capital in case of borrower accounts already covered under the scheme

Existing Provision:

In terms of Clause 8(i), Chapter III of CGS :

"A one time guarantee fee at specified rate (currently 2.5 per cent) of the credit facility sanctioned, (comprising term loan and / or working capital facility) shall be paid upfront to the Trust by the eligible institution availing of the guarantee within 30 days from the date of first disbursement".

Further, Clause 9, Chapter IV of CGS inter-alia states -

" . The guarantee cover will commence 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. Where working capital alone is extended to the eligible borrower, the guarantee cover shall be for a period of 5 years or a block of 5 years, or for such period as may be specified by the Trust in this behalf."

Modified Provision:

A one time guarantee fee at specified rate (currently 2.5 per cent) of the credit facility sanctioned, (comprising term loan and / or working capital facility) shall be paid upfront to the Trust by the eligible institution availing of the guarantee within 30 days from the date of first disbursement

In case of borrowers already covered under the Scheme for working capital facilities, the guarantee fee for additional working capital facilities extended shall be levied on pro-rata basis for the remaining number of years in the block of 5 year period, considering the any part period in the year, as full year.

Date of effect of modification: Applicable in respect of working capital enhancement proposals, which are approved under the Scheme effective February 01, 2005.

Rationale for the Change:

The tenure of the guarantee cover is for a period of 5 years or a block of 5 years, or such period as may be specified by CGTSI, where working capital facility alone is extended by the MLI. During this period of 5 years, if the MLI is extending additional working capital to the borrower already covered under the Scheme, it has to pay guarantee fee of 2.5% on the enhanced portion of credit facility for coverage under CGS. However, the guarantee cover on the additional sanction is available for a period of 5 years from the date of first limit sanctioned / renewed, irrespective of the date of further enhancement during the said block of 5 years. This effectively raises the cost of guarantee for subsequent loans covered under the Scheme, as the guarantee fee on enhanced amount is payable for shorter duration of coverage. Hence, to correct this anomaly, it is proposed to levy guarantee fee for the enhanced limit on pro-rata basis only for the remaining period of original guarantee cover (in complete years by treating the remaining period in the year of enhancement, as full year).

5) Linking levy of annual service fee to the credit facility sanctioned & covered under the scheme

Existing Provision:

In terms of Clause 8 (ii), Chapter III of CGS -

"The Annual Service Fee at specified rate (currently 1% p.a.) on the outstanding amount to the debit of the borrower's accounts covered under the scheme as on March 31 of each year shall be paid by the lending institution within 60 days i.e. May 31 of every year."

Modified provision:

The Annual Service Fee at specified rate (currently at 0.75% p.a.) on the amount of credit facility extended by the MLI, which is covered under the scheme and in respect of which guarantee fee has been paid as on March 31 shall be paid by the lending institution within 60 days i.e. May 31 of every year.

Date of effect of modification: Applicable in respect of all guarantees extended by the Trust since inception that are in force. The annual service fee with revised rate is payable in respect of guaranteed accounts as on March 31, 2005 and would remain applicable in respect of all credit facilities covered under CGS, in future also.

Rationale for the Change:

For the purpose of remittance of Annual Service Fee (ASF), the operating offices of MLIs have to obtain the details of outstanding loans in respect of all borrowers covered under the scheme from their branches. In view of the efforts and time for the purpose, sometimes the remittance of service fee gets delayed and on some occasions, the Trust had to cancel the guarantee cover in respect of accounts where the service fee had not been received from the MLIs even after repeated reminders. As the number of accounts covered under the scheme increase, it would become increasingly difficult to obtain / monitor the data of outstanding of each account. In order to streamline the procedure, linking of ASF to the loan / credit facility extended and covered under the scheme (instead of the outstanding balance) has been discussed during the workshops and training programmes of some of the MLIs. The rationalization of this procedure would reduce avoidable paper work for both MLIs and CGTSI. As hitherto, in the first year in which the guarantee cover is issued to the MLIs, ASF will be charged on pro-rata basis for the period during which the guarantee cover remains extended. Since, in the proposed arrangement, levying of ASF will be linked to the credit sanctioned and covered under CGS by the MLIs, levying of ASF will not depend either on disbursement of credit facility or the outstanding amount in the borrowal account as of March 31 of the relevant year.

6) Refund of guarantee fee and annual service fee paid by MLIs

Existing Provision:\

There is no provision in the Scheme relating to refund of guarantee fee and annual service fee paid by the lending institution to the Trust. A specific clause in the Scheme is being inserted to cater to this requirement in certain genuine cases.

Modifications/Additions:

Clause 8 (iv), Chapter III : (New clause being inserted under CGS)

The guarantee fee and / or annual service fee once paid by the lending institution to the Trust is non-refundable.

Comments:

Guarantee fee / Annual Service Fee, shall not be refunded, except under certain circumstances like -

(i)                  excess remittance,

(ii)                remittance made more than once against the same credit application,

(iii)               guarantee fee & / or annual service fee not due,

(iv)              guarantee fee paid in advance but application not approved for guarantee cover under the scheme, etc.

The above modifications / changes in the Scheme will also affect the relevant clauses, related provisions of the scheme and the circulars issued by the Trust from time to time.