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Government increases loss coverage for micro loan defaults under CGFMU scheme

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On April 16, 2020 According to the amendment of Credit Guarantee Fund for Micro Units (CGFMU) scheme as notified by the Ministry of Finance states that the coverage of lender’s loss in case of loan default is increased to 75% from earlier 50%.Govt increases loss coverage for micro loan

  • The aim of the amendment is to incentivise lending to micro businesses which bear the impact of coronavirus outbreak & the lockdown.

Key Points

i.Lenders can pay a fee for the portfolio of loans they want to cover under the guarantee, which enables them to lend easily while improving profitability

ii.As a relief to borrowers, the personal assets of the borrower will not be included in the loss calculation and will be assured that no collateral will be enforced if the loan account turns bad. As the loan recovery process, the assets created from the loan can be attached.

iii.The lender’s burden under the scheme has reduced from the first 5% of the amount in default to 3%.

iv.The loans are sanctioned to Self Help Groups (SHGs) between 10 lakhs and 20 lakhs during FY 2020-21 under the scheme, where the 1st loss guarantee is Nil & the 2nd is 75% per annum in subsequent years.

v.The guarantee fee will be charged on outstanding balance at the time of sanction (on a pro rata basis) and thereafter on an annual basis for renewals & the credit facilities for SHGs included here are not supported by any network.

About the CGFMU scheme:
The scheme was announced in April 2016 covering microloans up to Rs 10 lakhs extended under the Pradhan Mantri Mudra Yojana(PMMY).