The government of India set up the CGTMSE with the aim to ensure that project viability remains the main criteria to secure credit for micro and small enterprises. It also ensures that loans and credit facility should be secured purely on the primary security of the assets financed. Another objective is that lender should give composite loan to the borrowers so that they obtain term loan and working capital from the same agency.

As per the Credit Guarantee Scheme (CGS), if a Micro or Small Enterprise (MSE) avails loans without collateral and fails to pay back the money, then the Guarantee Trust will make good the loss suffered by the lender up to 75/80/85 per cent of credit facility.

The CGTMSE covers credit up to 100 lakh extended by eligible institutions to new as well as existing micro and small enterprises. The guarantee cover available under the scheme is up to 75/80 per cent of the sanctioned amount of the credit facility, with a maximum guarantee cap of Rs 62.50 lakh / Rs 65 lakh. The extent of guarantee cover is 85 per cent for micro enterprises for credit up to Rs 5 lakh.

For micro and small enterprises owned by women the guarantee cover is 80 per cent and the same the case for credits and loans in North Eastern Region. If a business owner or entrepreneur defaults than the trust settles the amount up to 75 to 80 per cent of the credit facility extended by lending institution.

As per the CGTMSE, the eligible credit facilities should be immediately covered.

As per a latest RBI direction, collateral free loans up to Rs 5 lakh sanctioned to MSE units must be provided by all the banks to both manufacturing as well as service enterprises. This direction came after there was dillydallying on part of the banking sector on the issue of extending collateral free loans.

The institutions eligible for credit guarantees are:

All Scheduled Commercial Banks (either PSU, Private or Foreign Banks), select Regional Rural Banks, or such of those institutions as may be directed by GOI can avail of guarantee cover in respect of their eligible credit facilities under the Scheme. Small Industries Development Bank of India (SIDBI), National Small Industries Corporation Ltd (NSIC) and North Eastern Development Finance Corporation Ltd (NEDFI) have been included as eligible institutions

The businesses eligible for Credit Guarantee facility:

New and existing Micro and Small Enterprises engaged in manufacturing or service activity excluding 'Retail Trade'. As of now, all activities that come under service sector as per RBI's guidelines on 'Lending to Priority Sector' and MSMED Act, 2006 except retail trade are eligible for coverage under the scheme.