ABSTRACT

Like all emerging economies, difficulty in accessing timely and adequate credit is one of the factors that inhibits the growth of micro, small, and medium-sized enterprises in India. The sector plays a crucial role in the socio-economic development of India in terms of its contribution to the manufacturing output (over 33% of total output), employment (over 111 million), and exports (45%). Hence, it is imperative for the government to find ways to bridge the financing gap for the smaller enterprises while simultaneously helping commercial banks overcome their inherent reluctance to extend credit to such units. The Credit Guarantee Scheme (CGS), which is sponsored by the Ministry of Micro, Small and Medium Enterprises and administered by the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE), aims at improving the access to and terms of credit for micro and small enterprises, while ensuring that no collateral or third-party guarantees are required by the lenders. The scheme has incentivized banks to lend on the intrinsic strength of the proposed project rather than collateral-based lending. The chapter brings out the objectives underlying the CGS, its evolution and impact since it was started in August 2000, how it measures against the World Bank principles for such schemes, the learnings and need-based changes made as it has matured, recommendations for further improving its efficacy, and how its success has led to the setting up of a variety of innovative guarantee programs in the country.