Credit Guarantee Fund for Micro Units (CGFMU) notified

Dated 18th April, 2016 | Copy of | Notification Sl93 |

In pursuance of the approval of the Cabinet vide its minutes of the meeting dated 6th January 2016, the Central Government hereby makes the following scheme for the purpose of providing guarantees to loans extended under Pradhan Mantri Mudra Yojana (PMMY).

CHAPTER I
INTRODUCTION

1. Title and date of commencement

i. The Scheme shall be known as the Credit Guarantee Fund for Micro Units (CGFMU).

ii. It shall come into force from the date notified by the Government of India and micro loans sanctioned since 8th April, 2015 with features covered under the Scheme.

iii. The broad objective of the Fund would be to guarantee loans up to the specified limit sanctioned by Banks/NBFCs/MFIs/other financial intermediaries engaged in providing credit facilities to eligible micro units.

2. Definitions

For the purposes of this Scheme

i. “Fund” means the Credit Guarantee Fund for Micro Units (CGFMU) set up by Government of India with the purpose of guaranteeing payment against default in micro loans extended to eligible borrowers by Banks/NBFCs/MFIs/Other financial intermediaries, managed by the Board of NCGTC as the trustee of the Fund.

ii. “NCGTC” means National Credit Guarantee Trustee Company set up on March 28, 2014 by Government of India under the Companies Act 1956 to act as the Trustee to operate various Credit Guarantee Funds, set up/to be set up by Government of India from time to time.

iii. “Portfolio” means cumulative built up of quarterly outstanding balance of eligible micro loans sanctioned on or after the date of launching of PMMY; i.e. April 08, 2015, which have not been classified as a Non performing asset in the books of the lending institution. Portfolio, comprising the corresponding sanction amount, would get crystallized at the end of the financial year in which the portfolio is built up (base year). Accordingly, fresh portfolio would commence from the beginning of the subsequent financial year.

iv. “Base year of the portfolio” means the year of inception and crystallization of the portfolio. In other words, the financial year in which the portfolio is built up.

v. “Date of crystallization of the portfolio” is the end of the financial year (March 31) in which the portfolio is built up (base year).

vi. “Currency of the portfolio” is 3 complete financial years from the end of the date of crystallization of the portfolio. Therefore, total period of currency of portfolio will be base year plus three complete financial years.

vii. “Amount in Default” means the amount of Non-Performing Asset (NPA), as per Reserve Bank of India guidelines, which has remained NPA for a continuous period of ‘more than 6 months’ from the date of account turning NPA, within the crystallized portfolio of micro loans.

viii. “Interest Rate” for a lending institution means the rate so declared by that lending institution from time to time as per Reserve Bank of India guidelines based on which interest rate applicable for the loan will be determined.

ix. “Borrower” means micro unit who has executed loan documents with the lending institution to avail micro loan.

x. “Collateral security” means the security provided in addition to primary security/personal obligation of borrower/co-borrower. Primary security would mean all the assets (movable/ immovable) owned by the borrower, including the personal obligation [personal guarantee] of the borrower.

xi. “Micro Loan” means any financial assistance by way of collateral free/third party guarantee free loan/limit (currently Rs.10 lakh), extended by the lending institution to the eligible borrower, as per the guidelines prescribed by the Fund. Under the aegis of Pradhan Mantri MUDRA Yojana, MUDRA Ltd. has already been created to support development and financing of micro loans. The schematic interventions of MUDRA Ltd. have been named ‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth/development and funding needs of the beneficiary micro unit/entrepreneur and also provide a reference point for the next phase of graduation/growth. They are presently defined as under:

o Shishu: covering loans upto 50,000/- (Interest rate as stipulated by Mudra; presently not to exceed 12% p.a.)

o Kishor : covering loans above 50,000/- and upto 5 lakh

o Tarun : covering loans above 5 lakh and upto 10 lakh

Further, Overdraft facility of Rs.5,000/- sanctioned under PMJDY accounts shall also be eligible to be covered under Credit guarantee Fund.

xii. “Eligible borrower” means new or existing micro unit/enterprise as defined in the MSMED Act, 2006, who meets eligibility criteria prescribed by the Fund and whose credit requirement does not exceed the specified limit. Specified limit of the loan shall be Rs.10 lakh or such other amount as may be decided by the Fund from time to time. Further, Overdraft loan amount of Rs.5,000/- sanctioned under PMJDY accounts shall also be eligible to be covered under Credit guarantee Fund.

xiii. “Guarantee Cover” means maximum cover available per portfolio, based on the amount in default, in respect of the credit facility extended by the lending institution. The first 5% of the amount in default will be borne by the eligible lending institution. The amount in default over and above 5% (if applicable) will be settled by the fund to the extent of 50% on pro-rata basis, subject to the receipt of an Auditors’ certificate confirming eligible claim amount.

xiv. “Eligible Lending institution(s)” means a Bank or a Micro Finance Institution (MFI)/Non- Banking Finance Company (NBFC)/other financial intermediary approved by Mudra Ltd. as member financial institutions.

xv. “Member Lending institution(s)” means a Bank or a Micro Finance Institution (MFI)/Non- Banking Finance Company (NBFC)/other financial intermediary conforming to the eligibility criteria duly approved by the Fund, from time to time, engaged in the business of extending credit to micro units and who have entered into an agreement with the Fund for availing the guarantee. The Fund may, on review of performance, remove any of the lending institution from the list.

xvi. “Material Date” means the date on which the guarantee fee on the amount covered in respect of eligible borrower becomes payable by the lending institution to the Fund.

xvii. “Non Performing Assets” means an asset classified as a non-performing asset based on the instructions and guidelines issued by the Reserve Bank of India from time to time.

xviii. “Scheme” means the Credit Guarantee Fund for Micro Units. Accordingly, all matters pertaining to the operations of CGSMU would be undertaken by NCGTC on behalf of the said Fund Trust.

CHAPTER II
SCOPE AND EXTENT OF THE SCHEME

3. Guarantees by the Fund

i. Subject to the other provisions of the Scheme, the Fund undertakes, in relation to loans extended to an eligible micro unit by a lending institution which has entered into the necessary agreement for this purpose with the Fund, to provide guarantee against default in repayment of micro loans extended by the lending institutions.

ii. The Fund reserves the discretion to accept or reject any proposal referred by a lending institution which otherwise satisfies the norms of the Scheme.

4. Micro loans eligible under the Scheme:

The Fund shall cover micro loans up to the specified limit (currently Rs.10 lakh) extended by Member Lending Institution(s) to an eligible borrower, provided that the lending institution applies for guarantee cover in respect of such loans so sanctioned within such time period and as per procedures prescribed by the Fund for the purpose. Further, Overdraft loan amount of Rs.5,000/- sanctioned under PMJDY accounts shall also be eligible to be covered under Credit guarantee Fund.

It may be noted that micro loans under PMMY inclusive of overdraft under PMJDY, sanctioned since 8th April 2015 would qualify for guarantee cover under the scheme.

The Fund may, at its discretion, approve/frame a list of Member Lending Institutions and/or their schemes, for which the guarantee cover will be available, or a negative list for which the guarantee cover shall not be available.

5. Micro Loans not eligible under the Scheme

The following micro Loans shall not be eligible for being guaranteed under the Scheme: -

i. Any micro Loan in respect of which risks are additionally covered under a scheme operated/ administered by any other institution, to the extent they are so covered.

ii. Any micro Loan 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.

iii. Any micro Loan, which does not conform to, or is in any way inconsistent with, the provisions of any law, or with any directives or instructions issued by the Central Government or the Reserve Bank of India, which may, for the time being, be in force.

iv. Any loan which has been sanctioned by the lending institution not conforming to interest rates as may be prescribed for such loans by the competent regulatory authority or such other rate as may be specified by the Fund from time to time will not qualify for guarantee cover. However, the Fund may revise such ceiling from time to time keeping in view the prevailing interest rate scenario, bank rates of lending institutions and RBI’s Credit Policies, from time to time.

6. Agreement to be executed by the lending institution

A lending institution shall not be entitled to a guarantee in respect of eligible Micro Loan granted by it unless it has submitted an undertaking with the Fund in such form as may be required by the Fund for covering by way of guarantee, under the Scheme all the eligible Micro Loans granted by the lending institution, for which provision has been made in the Scheme.

7. Responsibilities of lending institution under the Scheme:

i. The lending institution shall evaluate Micro Loans in accordance with the guidelines issued by Reserve Bank of India/the Fund and conduct the account(s) of the borrowers with normal lending prudence.

ii. The lending institution shall pool all its outstanding micro loans extended against sanctions effected on or after April 08, 2015 as at the end of a quarter (quarter ended March, June, September and December) as part of the portfolio during the base year and ensure to submit the information required by NCGTC for giving guarantee cover with regard to the micro borrowal account during the currency of the portfolio.

iii. The MLI would need to furnish a Statutory Auditor Certificate/ Management Certificate as prescribed by the Fund from time to time, certifying the following:

(a) All accounts in the portfolio conform to eligible micro loans sanctioned after the date of April 08, 2015.

(b) All accounts covered in the initial portfolio as well as new accounts added in the portfolio subsequently, are standard accounts.

(c) All accounts which have turned NPA within the portfolio and for which claim has not been lodged have to be included in the portfolio on which the guarantee fee is payable.

iv. The statutory auditor/management shall certify the amount of non-performing asset of the crystallized portfolio as on the date of March 31 every year, by the second quarter of every financial year from the date of crystallization of the portfolio, during the currency of the portfolio.

v. The lending institution shall closely monitor the borrower account and follow up for repayment.

vi. The payment of guarantee claim by the Fund to the lending institution does not in any way take away the responsibility of the lending institution to recover the entire outstanding amount of the credit from the borrower with applicable interest. The lending institution shall exercise all the necessary precautions and maintain its recourse to the borrower for entire amount of micro loan owed to it and initiate such necessary actions for recovery of the outstanding amount, including such action as may be advised by the Fund.

vii. The lending institution shall comply with such directions as may be issued by the Fund, from time to time, for facilitating recoveries in the guaranteed account, or safeguarding its interest as a credit guarantor, as the Fund may deem fit and the lending institution shall be bound to comply with such directions.

viii. The lending institution shall, in respect of any guaranteed account, exercise the same diligence in recovering the dues, and safeguarding the interest of the Fund in all the ways open to it as it might have exercised in the normal course if no guarantee had been furnished by the Fund. The lending institution shall, in particular, refrain from any act of omission or commission, either before or subsequent to invocation of guarantee, which may adversely affect the interest of the Fund as the guarantor. In particular, the lending institution should intimate the Fund while entering into any compromise or arrangement, which may have effect of discharge or waiver of personal guarantee(s) or primary security. Further, the lending institution shall secure for the Fund or its appointed agency, through a stipulation in an agreement with the borrower or otherwise, the right to publish the defaulted borrowers’ names and particulars by the Fund.

ix. The lending institution shall provide the performance review of the portfolio at the transaction level as at the end of every financial year, including base year, in the manner as prescribed by the Fund.

CHAPTER III
FEE STRUCTURE

8. Guarantee Fee

i. For availing the guarantee coverage, the Member Lending Institution shall pay guarantee fee as under:

a) During the base year (year of portfolio built-up) – Guarantee fee will be paid on the sanctioned amount corresponding to the outstanding balance of the quarterly built up balance of the portfolio of micro loans for the full year or the broken period i.e. till March 31 of the subsequent year, as the case may be, and the Guarantee will be valid upto the end of that financial year. It may be noted that for such sanctioned cases which have been cancelled/repaid/pre-paid/taken over during the currency of the portfolio, no guarantee fee shall be charged for such sanctioned cases in the portfolio and no guarantee cover would be applicable.

b) During subsequent years- The guarantee fee will be paid on the sanctioned amount corresponding to the outstanding balance (including on accounts which have turned NPA) of the crystallized portfolio during the currency of the portfolio and Guarantee will be valid upto the end of that financial year. Guarantee fee with respect to NPA accounts in the portfolio would continue to be paid till lodgment of claim for such accounts, at a rate specified by the Fund on the amount or fee based on risk based pricing/such other amount on such reference dates or specified rate set by the Fund from time to time (risk based guarantee fee components given at Attachments in respect of 5 Models).

The portfolio as at the end of third year from the date of crystallization will be finally settled and terminated. The outstanding balance of the terminated portfolio at the end of the third year will be deemed to be a new portfolio and could be merged with the current portfolio of that year at the discretion of the lending institution.

ii. Guarantee fee shall be paid within 16 days from the end of the quarter. (The MLI would need to furnish a Management Certificate within 7 days from the end of the quarter, after which, a Credit Guarantee Demand Advice Note [CGDAN] would be issued by NCGTC within 3 day of receipt of Management Certificate and subsequently, the guarantee fee shall be payable within 3 days from the issue of CGDAN)

iii. All cases within the portfolio for which the guarantee fee has been paid by MLI, would be covered under the credit guarantee scheme subject to the loan accounts within the portfolio being eligible micro loans.

iv. The Fund may at its discretion, charge risk based pricing i.e., different guarantee fees for different Member Lending Institutions depending on their credit rating, NPA levels, claim payout ratio, geographical spread, etc.; or such other parameters as per the experience of the Fund based on the performance of the portfolios of the respective MLIs.

v. Provided further that in the event of non-payment of guarantee fee within the stipulated time or such extended time that may be agreed to by the Fund on such terms, liability of the Fund to guarantee such credit facility would lapse in respect of those credit facility against which the fee is due and not paid.

vi. The amount equivalent to the guarantee fee payable by the eligible lending institution may be recovered by it, at its discretion from the eligible borrower.

vii. The guarantee fee once paid by the lending institution to the Fund shall be non-refundable, except under certain circumstances like.

• Excess remittance,
• Remittance made more than once against the same portfolio,
• Fee paid in advance but application not approved for guarantee cover under the scheme, etc.

CHAPTER IV
GUARANTEES

9. Extent of the guarantee

i. In the nature of ‘First Loss Portfolio Guarantee’, wherein first loss to the extent of 5% of the crystallized portfolio of the MLI, will be borne by the MLI and therefore, will be excluded for the claim. Out of the balance portion, the ‘extent of guarantee’ will be to a maximum extent of 50% of ‘Amount in Default’ in the portfolio or such other percentage as may be specified by the Fund from time to time on a pro-rata basis.

ii. The guarantee cover will commence from the date of payment of guarantee fee and shall run through the agreed tenure of the repayment of Micro loan or the termination date of the portfolio, whichever is earlier, subject to yearly renewal of the guaranteed portfolio.

iii. The overall guarantee payout for an MLI would be linked to exposure norms/payout caps as may be specified by the Fund from time to time.

CHAPTER V
CLAIMS

10. Invocation of guarantee

i. The lending institution may invoke the guarantee in respect of the ‘amount in default’ out of the crystallized portfolio of micro loans, subject to the condition of first loss guarantee, after 1 year from the date of crystallization of the portfolio and thereafter, at the end of every financial year.

ii. The MLI shall furnish a statutory auditor/management certificate confirming that the amount due and payable to the lending institution in respect of the micro loan has not been paid and the dues have been classified by the lending institution as Non Performing Asset. Provided that the lending institution shall not make or be entitled to make any claim on the Fund in respect of the said micro loan if the loss in respect of the said credit facility had occurred owing to actions/decisions taken contrary to or in contravention of the guidelines issued by the Fund. The certificate shall also mention the percentage of the amount in default borne by the MLI towards first loss.

iii. The claim should be preferred by the lending institution in such manner and within such time as may be specified by the Fund in this behalf.

iv. The Fund shall pay eligible claim amount on preferring of claims by the lending institution, within 60 days, subject to the claim being otherwise found in order and complete in all respects. The Fund shall pay to the lending institution interest on the eligible claim amount at the prevailing Bank Rate for the period of delay beyond 60 days. On a claim being paid, the Fund shall be deemed to have been discharged from all its liabilities on account of the guarantee in force in respect of the borrower concerned.

v. The lending institution shall be liable to refund the claim released by the Fund together with penal interest at the rate stipulated by the Fund, if such a recall is made by the Fund in the event of deficiencies having existed in the matter of appraisal/renewal/follow-up/conduct of the micro loan or where lodgment of the claim was more than once or where there existed suppression of any material information on part of the lending institutions for the settlement of claims. The lending institution shall pay such penal interest, when demanded by the Fund, from the date of the initial release of the claim by the Fund to the date of refund of the claim.

11. Subrogation of rights and recoveries on account of claims paid

i. The lending institution shall furnish to the Fund, the details of its efforts for recovery, realizations and such other information as may be demanded or required from time to time.

ii. Every amount recovered and due to be paid to the Fund shall be paid without delay, and if any amount due to the Fund remains unpaid beyond a period of 30 days from the date on which it was first recovered, interest shall be payable to the Fund by the lending institution at the rate stipulated by the Management Committee for the period for which payment remains outstanding after the expiry of the said period of 30 days.

CHAPTER VI
MANAGEMENT

Constitution

The Fund shall have a Management Committee to be appointed by the Settlor of the Fund consisting of Secretary, MSME as the ex-officio Chairperson; Chairman, MUDRA (SIDBI) Bank; Joint Secretary, DFS; Chief Executive Officer, MUDRA (SIDBI) Bank; Chief Executive Officer, NCGTC as Member Secretary/Convenor and two experts in the field to be co-opted by the Managing Committee.

A member appointed as above in his/her ex-officio capacity shall remain as a member only as long as he/she holds that office and upon his/her vacating that office, his/her successor shall become a member without any further act or deed.

The Settlor may, if required, change the constitution of the Management Committee by incorporating a new corporate entity or otherwise and till such time the existing members of the Management Committee will continue.

The member of the Fund shall be resident of India. The office of the member shall be vacated if he shall permanently leave India or if for reasons of illness of infirmity or mental incapacity he, in the opinion of the Government, becomes incompetent or incapable to act, as Member.

A member may retire at any time after giving seven days’ notice in writing to the Government and unless he is the Chairperson of the Management Committee, a copy of the notice shall also be sent to Chairperson.

Functions of Management Committee (MC)

The M.C. will be responsible for reviewing the Scheme and providing necessary guidance to the Board of NCGTC on the matters related to the Fund. The Board of NCGTC would be the competent authority related to all the policy and operational matters of the Scheme.

CHAPTER VII

MISCELLANEOUS

1. Appropriation of amount realized by the lending institution in respect of a credit facility after the guarantee has been invoked.

Where subsequent to the Fund having released a sum to the lending institution towards the amount in default in accordance with the provisions contained in this scheme, the lending institution recovers money subsequent to the recovery proceedings initiated by it, the same shall be deposited by the lending institution with the Fund, after adjusting towards the legal costs incurred by it for recovery of the amount.

2. Fund’s liability to be terminated in certain cases

(i) If the liabilities of a borrower to the lending institution on account of Loan guaranteed under this Scheme are transferred or assigned to any other borrower and if the conditions as to the eligibility of the borrower and the amount of the Loan and any other terms and conditions, if any, subject to which the Loan can be guaranteed under the Scheme are not satisfied after the said transfer or assignment, the guarantee in respect of the Loan shall be deemed to be terminated as from the date of the said transfer or assignment.

(ii) If a borrower becomes ineligible for being granted Loan under the Scheme, the liability of the Fund in respect of Loan granted to him by a lending institution under the Scheme shall be limited to the liability of the borrower to the lending institution as on the date on which the borrower becomes so ineligible, subject, however, to the limits on the liability of the Fund fixed under this Scheme.

3. Returns and Inspections

(i) The lending institution shall submit such statements and furnish such information as the Fund may require in connection with guarantee under this Scheme.

(ii) The lending institution shall also furnish to the Fund all such documents, receipts, certificates and other writings as the latter may require and shall be deemed to have affirmed that the contents of such documents, receipts, certificates and other writings are true, provided that no claim shall be rejected and no liability shall attach to the lending institution or any officer thereof for anything done in good faith.

(iii) The Fund shall, insofar as it may be necessary for the purposes of the Scheme, have the right to inspect or call for copies of the books of account and other records (including any book of instructions or manual or circulars covering general instructions regarding conduct of advances) of the lending institution, and of any borrower from the lending institution. Such inspection may be carried out through the officers of the Fund or any other person appointed by the Fund for the purpose of inspection. Every officer or other employee of the lending institution or the borrower, who is in a position to do so, shall make available to the officers of the Fund or the person appointed for the inspection as the case may be, the books of account and other records and information which are in his possession.

4. Conditions imposed under the Scheme to be binding on the lending institution

i. Any guarantee given by the Fund shall be governed by the provisions of the Scheme as if the same had been written in the documents evidencing such guarantee.

ii. The lending institution shall as far as possible ensure that the conditions of any contract relating to an account guaranteed under the Scheme are not in conflict with the provisions of the Scheme but notwithstanding any provision in any other document or contract, the lending institution shall in relation to the Fund be bound by the conditions imposed under the Scheme.

5. Modifications and exemptions

i. The Fund reserves to itself the right to modify, cancel or replace the scheme so, however, that the rights or obligations arising out of, or accruing under a guarantee issued under the Scheme up to the date on which such modification, cancellation or replacement comes into effect, shall not be affected.

ii. Notwithstanding anything herein contained, the Fund shall have a right to alter the terms and conditions of the Scheme in regard to an account in respect of which guarantee has not been issued/invoked as on the date of such alteration.

iii. In the event of the Scheme being cancelled, no claim shall lie against the Fund in respect of facilities covered by the Scheme, unless the provisions contained in the Scheme are complied with by the lending institution prior to the date on which the cancellation comes into force.

6. Interpretation

If any question arises in regard to the interpretation of any of the provisions of the Scheme or of any directions or instructions or clarifications given in connection therewith, the decision of the Fund shall be final.

7. Supplementary and general provisions

In respect of any matter not specifically provided for in this Scheme, the Fund may make such supplementary or additional provisions or issue such instructions or clarifications as may be necessary for the purpose of the Scheme.

Sd/-
(Pankaj Jain)
Jt. Secy. (IF)

S.O.1443(E)
F. No. 27/04/2015-IF-II (Vol.II)
Issued by:
Ministry of Finance
(Department of Financial Services)
New Delhi

Attachment

Risk Based Guarantee Fee components

1. Scheduled Commercial Banks (SCBs)

Standard Basic Rate (SBR) of 1.00% of sanctioned amount ; and

2. Micro Finance Institutions (MFIs)

Standard Basic Rate (SBR) of 1.00% of sanctioned amount ; and

3. Non Banking Financial Companies (NBFCs)

{Asset Finance Company (AFC) and Loan Company (LC)}

Standard Basic Rate (SBR) of 1.00% of sanctioned amount ; and

4. Regional Rural Banks (RRBs)

Standard Basic Rate (SBR) of 1.00 % of sanctioned amount ; and

5. Cooperative Banks

Standard Basic Rate (SBR) of 1.00 % of sanctioned amount ; and

Note:-

 The Guarantee Fee for all MLIs shall be reviewed each year based on Credit Rating/Grading and Claim payout ratio of previous financial year. Accordingly, revised updated fee structure will be applicable for all fresh cases.

 The total claim payout ratio would be capped at 15% of the original sanctioned guarantee limit with a view to ensure equitable distribution of benefits and sound credit management by MLIs.

The Fee structure has in-built incentive/rebate for “No Claim Bonus”. However, as in initial years, say first 2-3 years, since NPA/claims history would not have been established, risk premium for NPA/claim payout ratio shall be calculated in the same scale corresponding to credit rating/grading. The premium rates/weights proposed may be changed by Management Committee based on market conditions/practices/support from Government of India.