Policy Update
Aditi Natasha Bhuinyan
Background
Micro, Small and Medium Enterprises (MSMEs) serve as the backbone of India’s economic structure, contributing to employment generation, industrial production, exports, and regional development. But limited access to institutional credit has remained a persistent challenge for many small enterprises. Inadequate collateral, delayed payments, and financial vulnerabilities have historically constrained their growth. These challenges became particularly severe during the COVID-19 pandemic, when disruptions in economic activity led to declining revenues and weakened the repayment capacity of small enterprises.
Recognising the financial distress faced by the MSME sector, the Government of India announced the creation of a Distressed Assets Fund for subordinate debt under the Aatmanirbhar Bharat Package on 13 May 2020. The initiative was formally launched as the Credit Guarantee Scheme for Subordinate Debt (CGSSD) on 24 June 2020 by the Ministry of Micro, Small and Medium Enterprises (Ministry of MSME, 2020a).
The scheme aimed to provide financial assistance to operational MSMEs that had become stressed or were classified as non-performing assets (NPAs). Unlike conventional credit support mechanisms that provide loans directly to enterprises, CGSSD offered credit to promoters of eligible MSMEs, enabling them to infuse the funds into their businesses as equity or quasi-equity. This mechanism was intended to strengthen the capital structure of distressed enterprises, support employment, and facilitate their revival (Ministry of MSME, 2020a).
The scheme initially envisaged guarantee coverage of ₹20,000 crore and aimed to support approximately two lakh MSMEs. It was subsequently extended several times, with its operational period ultimately continuing until 31 March 2023 (Ministry of MSME, 2022). The scheme represented an important policy intervention because it was launched to address the difficulties faced by financially distressed but potentially viable enterprises in obtaining fresh credit from formal lending institutions.
Functioning
The CGSSD was implemented through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), under the Ministry of MSME. The scheme operated through Member Lending Institutions (MLIs), including eligible banks and financial institutions, which extended credit to promoters of stressed MSMEs (Ministry of MSME, 2020a).
Unlike conventional credit schemes that provide loans directly to enterprises, CGSSD adopted a different approach. It provided subordinate debt to promoters of eligible MSMEs, who were expected to invest the funds back into their businesses as additional capital. This allowed enterprises to strengthen their capital base and improve their financial position, making it easier for them to continue operations and pursue restructuring.
The scheme primarily targeted operational micro and small enterprises that had become stressed or had been classified as non-performing assets (NPAs), including eligible Special Mention Account-2 (SMA-2) accounts. These enterprises were required to meet the prescribed eligibility conditions and be eligible for restructuring under applicable Reserve Bank of India (RBI) guidelines (Ministry of MSME, 2021).
Under the original guidelines, promoters could receive subordinate debt equivalent to 15% of their existing stake or ₹75 lakh, whichever was lower. Later modifications increased the assistance limit to 50% of the promoter’s existing stake, subject to the same maximum ceiling of ₹75 lakh (Ministry of MSME, 2020b; Ministry of MSME, 2023).
To encourage lending institutions to participate, the scheme provided 90% guarantee coverage on the eligible credit facility, while the remaining 10% was to be contributed by the promoter. The guarantee was intended to reduce the risk borne by lending institutions and encourage them to extend credit to enterprises that might otherwise struggle to secure financing (Ministry of MSME, 2020b).
The maximum repayment period was set at ten years, with a moratorium of up to seven years on principal repayment. But the promoters were required to pay interest regularly during the moratorium period, while the principal amount had to be repaid within the remaining three years. This provided promoters with additional time to stabilise their businesses and improve their financial position before beginning principal repayments (Ministry of MSME, 2020b).
The implementation process involved several stages. Eligible MSMEs approached participating lending institutions for credit assistance. Lending institutions assessed the promoter’s eligibility and the financial condition of the enterprise. Eligible promoters received subordinate debt, which was subsequently infused into their enterprises as equity or quasi-equity. CGTMSE provided the prescribed guarantee coverage to lending institutions. The scheme’s design reflected an attempt to combine financial assistance with risk-sharing between the government, lending institutions, and promoters.
Performance
The performance of CGSSD shows a substantial gap between its original ambition and actual implementation. Introduced in 2020 to support financially distressed micro and small enterprises, the scheme aimed to provide ₹20,000 crore in guarantee coverage and assist approximately two lakh MSMEs. However, the number of enterprises that ultimately received support remained considerably below the initial target.
According to the Ministry of MSME, the scheme had approved guarantees for 803 beneficiaries, amounting to approximately ₹96.81 crore, as of 31 March 2023 (Ministry of MSME, 2023). Following multiple extensions and modifications to its guidelines, the scheme remained operational until this date.
Table 1: CGSSD—Original Target and Actual Performance
| Indicator | Value |
| Original guarantee coverage envisaged | ₹20,000 crore |
| Intended beneficiaries | Approximately 2 lakh MSMEs |
| Guarantees approved by 31 March 2023 | 803 |
| Guarantee amount approved | ₹96.81 crore |
| Operational period | 24 June 2020–31 March 2023 |
Source: Ministry of MSME (2020a, 2023).
The difference between the scheme’s original targets and actual approvals raises important questions about its reach and implementation. Against the proposed guarantee coverage of ₹20,000 crore, guarantees worth only ₹96.81 crore were approved, accounting for approximately 0.48% of the target. Similarly, only 803 MSMEs received guarantee approvals against the intended two lakh beneficiaries, representing just 0.40% of the target (Ministry of MSME, 2023; PIB, 2024).
The scheme underwent modifications to improve its effectiveness. The assistance limit was increased from 15% to 50% of the promoter’s existing stake, subject to the prescribed ceiling of ₹75 lakh. Eligibility provisions were also widened to make the scheme more accessible to distressed enterprises (Ministry of MSME, 2023).
However, these changes did not translate into large-scale utilisation. CGSSD highlights the gap between announcing financial support and ensuring that it reaches those who need it. Its limited uptake raises questions about the accessibility of credit guarantees and whether the scheme’s eligibility criteria and implementation mechanisms adequately addressed the financial challenges faced by distressed MSMEs.
Impact
1. Financial Revival of Distressed Enterprises:
The primary objective of the scheme was to enable financially distressed enterprises to obtain additional capital through subordinate debt. This was particularly important for businesses struggling to secure fresh credit because of their existing financial difficulties. By allowing promoters to infuse additional funds into their enterprises, the scheme sought to improve liquidity and strengthen capital structures (Ministry of MSME, 2020a). However, the limited number of guarantees approved raises questions about the scheme’s overall reach and contribution to MSME revival. The available aggregate implementation data do not indicate whether the assisted enterprises subsequently recovered financially.
2. Employment and Livelihood Protection:
MSMEs are an important source of employment, particularly for workers with limited formal qualifications and in regions with fewer employment opportunities. The scheme was intended to support the continuation of business operations and protect the livelihoods dependent on these enterprises (Ministry of MSME, 2020a). However, the available data do not establish how many jobs were preserved or how many enterprises successfully revived after receiving assistance. Thus the employment impact of CGSSD remains difficult to assess without enterprise-level evidence.
3. Strengthening Access to Institutional Credit:
The scheme sought to improve credit access for distressed enterprises by providing government-backed guarantee coverage to lending institutions. This was intended to encourage banks to support businesses that might otherwise struggle to obtain finance (Ministry of MSME, 2020a). But the low number of approved guarantees suggests that the presence of a credit guarantee alone may not be sufficient to overcome the structural barriers faced by financially distressed MSMEs.
4. Contribution to MSME Recovery:
CGSSD formed part of a broader government response to the economic disruption caused by COVID-19. Other initiatives, including the Emergency Credit Line Guarantee Scheme (ECLGS), also sought to support MSME liquidity and business continuity. Compared with CGSSD, ECLGS had a wider reach, highlighting the importance of designing financial support mechanisms according to the specific requirements of different categories of MSMEs.
Emerging Issues
1. Limited Utilisation:
The scheme’s actual performance remained significantly below its original target. This raises questions about whether eligible enterprises were adequately informed about the scheme and whether its implementation mechanism was sufficiently accessible.
2. Creditworthiness Concerns:
Although the guarantee reduced lending risk, financial institutions still needed to assess the repayment capacity of promoters and enterprises. For highly distressed enterprises, obtaining fresh credit could remain difficult even with government-backed guarantees.
3. Eligibility Restrictions:
The scheme targeted a specific category of distressed enterprises eligible for restructuring under RBI guidelines. While this targeting helped focus support on financially stressed MSMEs, it may also have excluded enterprises facing severe liquidity problems but not meeting the prescribed eligibility requirements.
4. Institutional Implementation:
The scheme depended on coordination among the Ministry of MSME, CGTMSE, lending institutions, and enterprise promoters. Differences in institutional capacity, risk assessment, and implementation practices may have influenced the extent to which enterprises could access assistance.
5. Limited Evidence on Long-Term Outcomes:
The number and value of guarantees approved provide information about implementation but do not establish whether enterprises recovered financially. Information on enterprise survival, repayment performance, employment retention, and changes in financial stability is required for better evaluation.
Way Forward
An assessment of the Credit Guarantee Scheme for Subordinate Debt highlights the importance of ensuring that financial support reaches the enterprises that need it most. While the scheme was introduced to help distressed MSMEs recover, its limited uptake suggests that providing credit guarantees alone may not be sufficient to address the financial difficulties faced by small businesses.
First, greater emphasis should be placed on identifying and reaching eligible enterprises through improved awareness and outreach. Coordination among lending institutions, state MSME departments, and industry associations could help ensure that enterprises are informed about available support.
Second, the design of credit guarantee schemes should reflect the financial realities of distressed enterprises. Simplifying application procedures, ensuring timely processing, and adopting appropriate risk assessment mechanisms could encourage greater participation by lending institutions while maintaining financial discipline.
Third, stronger monitoring and evaluation systems are required. Future programmes should track not only guarantees approved and credit disbursed but also enterprise recovery, employment retention, repayment performance, and long-term sustainability.
Fourth, financial assistance should be complemented by broader MSME development measures. Access to finance alone cannot address challenges such as delayed payments, limited market access, technological constraints, and inadequate business management capabilities.
Finally, policy interventions must distinguish between enterprises facing temporary liquidity problems and those experiencing deeper structural difficulties. A combination of credit support, restructuring, and targeted enterprise development measures may be more effective in supporting sustainable recovery.
References
- Ministry of Micro, Small and Medium Enterprises. (2020a, June 24). Ministry of MSME launches another funding scheme to help the distressed MSME sector. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1633907
- Ministry of Micro, Small and Medium Enterprises. (2020b). Frequently asked questions on Credit Guarantee Scheme for Subordinate Debt (CGSSD). Government of India. https://www.dcmsme.gov.in/FINAL-FAQs%20on%20Sub-Debt-Scheme-23-6-2020.pdf
- Ministry of Micro, Small and Medium Enterprises. (2021, October 4). Credit Guarantee Scheme for Subordinate Debt (CGSSD) extended up to 31 March 2022. Press Information Bureau, Government of India. https://www.pib.gov.in/Pressreleaseshare.aspx?PRID=1760766
- Ministry of Micro, Small and Medium Enterprises. (2022, March 14). Credit Guarantee Scheme for Subordinate Debt (CGSSD) extended up to 31 March 2023. Press Information Bureau, Government of India. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1805864
- Ministry of MSME. (2020). Guidelines for Credit Guarantee Scheme for Subordinate Debt (CGSSD) for Stressed/NPA MSMEs. https://dcmsme.gov.in/CLCS_TUS_Scheme/Distressed-Assets-Fund/Scheme_Guidelines.aspx
- Ministry of Micro, Small and Medium Enterprises. (2023, December 14). Unstarred Question No. 2035: Credit Guarantee Scheme for Subordinate Debt. Lok Sabha, Government of India. https://sansad.in/getFile/loksabhaquestions/annex/1714/AU2035.pdf
About the Contributor
Aditi Natasha Bhuinyan is an Economics postgraduate from the Delhi School of Economics, University of Delhi, with research interests in public policy, development economics, governance and environmental sustainability. With experience in empirical analysis and data-driven research, she is keen to explore how evidence-based research can inform policy solutions to contemporary development challenges.
Acknowledgement
The author sincerely expresses gratitude to the reviewers Lahari and Shiva and the IMPRI team for their expert guidance and constructive feedback throughout the process.
Disclaimer
The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views, policies, or positions of IMPRI (Impact and Policy Research Institute) or any other affiliated organisation.
