Credit Guarantee Scheme for subordinate debt/CGSSD explained

The credit facilities extended to MSMEs under ‘Distressed Assets Fund – Subordinate Debt for Stressed MSMEs scheme’ as a special dispensation, are backed by a guarantee from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). RBI vide its circular dated July 1, 2020 permitted all the scheduled commercial banks  to reckon the funds infused by the promoters in their MSME units through loans availed under the CREDIT GUARANTEE SCHEME FOR SUBORDINATE DEBT (CGSSD) scheme  as equity/quasi equity from the promoters for debt-equity computation.

What is Distressed Assets Fund – Subordinate Debt for Stressed MSMEs?

“Subordinate Debt” means credit facility extended to the Promoter(s) of the Stressed Units, for infusion in the units as Equity including Quasi Equity/Sub-Debt. In the other words, it is the personal loan provided by the banks to the promoters of stressed MSMEs for infusion as equity / quasi equity in the business eligible for restructuring, in addition to existing facility (called as ‘senior debt’), for restructuring of stressed MSME advances. Under this arrangement, promoter(s) of the MSME unit will be provided credit equal to 15 % of his/her stake (equity plus debt) or Rs.75 lakh whichever is lower. The loan from the banks for the above purpose is backed by CGTMSE known as Credit Guarantee scheme for subordinate debt (CGSSD) scheme. CGTMSE offers guarantee coverage of 90% of the loan amount and remaining 10% should be promoter(s)’s contribution in the form of equity (including sub-debt or quasi equity). The financial assistance provided as part of the scheme is to be operated as a separate loan account. Post-restructuring, NPA classification of these accounts shall be as per the extant IRAC norms. In case a borrower has existing limits with more than one lender, the CGSSD can be availed by the borrower through one lender only. A declaration from the borrower regarding its other banking arrangements and that it has not availed funding under the scheme from the other lenders.

Eligibility:

The promoters of MSME units which are stressed, viz. SMA-2, and NPA accounts as on 30.04.2020 and can become commercially viable as per the assessment of the lending institutions. The Scheme is applicable for those MSMEs whose accounts have been standard as on 31.03.2018 and have been in regular operations, either as standard accounts, or as NPA accounts during financial year 2018-19 and financial year 2019-20. However, fraud accounts and willful defaulters will not be considered under the proposed scheme. In cases where recovery proceedings are underway and banks assess that with the facilities provided under the scheme the account would be viable, the banks shall withdraw the recovery proceedings before going ahead with restructuring etc.

Repayment:

The tenor of sub-debt facility provided under CGSSD shall be as per the repayment schedule defined by the lender, subject to a maximum tenor of 10 years from the guarantee availment date or March 31, 2021 whichever is earlier. Banks may allow a moratorium of 7 years (maximum) on the payment of principal. The borrower shall pay only monthly interest charged to the account till the 7th year, and principal shall be repaid within a maximum of 3 years after completion of moratorium. Pre-payment of loan is permitted at no additional charge /penalty to the borrower.

Tenure of Guarantee Cover:

Any guarantee approved by the Credit Guarantee Fund Trust under this scheme shall be over and above the existing loan / guarantee sanctioned by the trust (over and above the eligible limit of Rs.200 lakh). The maximum period of guarantee cover from the guarantee availment date by the lending institution, which shall run through the agreed tenure of the Sub-debt facility between borrower and lending institution basis the assessment of debt serviceability or for a maximum period of 10 years whichever is earlier.

Guarantee Fee:

The guarantee fee @1.50% per annum on the guaranteed amount to the Trust on outstanding basis. Fee may be borne by the borrowers as per the arrangements between the borrower and the lender. The amount equivalent to the guarantee fee payable by the eligible lending institution may also be recovered by the lenders at their discretion from the eligible borrower.

Security:

The assets created out of the credit facility so extended and/or existing unencumbered assets which are directly associated with the projected business for which the credit facility has been / was been extended will be frozen as  “Primary Security”. The sub-debt facility so sanctioned by the lender will have 2nd charge of the assets financed under existing facilities for the entire tenor of the sub-debt facility. In addition to prime security the borrower/promoters may be asked to offer collateral security.

Settlement of Claim:

The Member Lending Institutions (MLIs) are required to inform the date on which the account was classified as NPA within 90 days of the account being classified as NPA as per RBI guidelines in CGTMSE online portal. The NPA marking needs to be done by the MLIs within next quarter from the time it becomes NPA in the online portal. The Trust shall pay 75 per cent of the guaranteed amount on preferring of eligible claim by the lending institution, within 30 days, subject to the claim being otherwise found in order and complete in all respects. The balance 25 per cent of the guaranteed amount will be paid on conclusion of recovery proceedings or till the decree gets time barred whichever is earlier. Post invocation of the guarantee claim, if any recoveries are made, MLIs (lender banks) shall first adjust such recoveries towards the legal costs incurred by them for recovery of the amount and their outstanding amount. Any amount recovered beyond that then shall be provided to trust up to the extent of amount of claim settled by the trust.

Source: Based on details provided in CGTMSE website