CGTMSE Coverage Is Live and the Bank Still Wants Collateral. What to Do.

CGTMSE coverage exists so that micro and small enterprises can borrow without pledging immovable property. The guarantee covers 75 to 85 percent of the outstanding amount in the event of default. The borrower pays an annual guarantee fee of 0.37 to 1.35 percent of outstanding, which the lender usually adds to the loan account.

Once the bank has filed the loan into the CGTMSE portal and the guarantee is live, the bank cannot ask for third-party immovable property as primary or collateral security. The hypothecation of business assets purchased with the loan and a personal guarantee from the proprietor are allowed. Property collateral from the proprietor or a third party is not.

A CGTMSE-covered loan is not just a sanction letter that mentions the scheme. The bank has to physically file the loan into the CGTMSE portal and the guarantee has to issue a Demand Promissory Note (DPN) ID. That ID is the proof.

Ask the branch for the CGTMSE Cover Reference Number in writing. A clean cover number looks like CG-MSE-YYYY-NNNNNN. If the bank says the file is "being sent for cover", the loan is not yet covered and you have every right to refuse signing collateral documents until it is.

A second check is the annual guarantee fee on your loan statement. A CGTMSE-covered loan shows a separate line item for the guarantee fee, debited annually. The absence of this debit on a loan that says it is covered is a red flag.

Branches sometimes ask for the proprietor's house as security on a CGTMSE-covered loan. This is not allowed. The proprietor's personal guarantee, which is a contractual undertaking to repay, is allowed. The branch is conflating the two and most owners do not push back.

Branches also ask for a third-party guarantor with their own property pledged. This is not allowed under CGTMSE rules. A third-party personal guarantor without any property pledge is technically allowed but is rare in practice and the CGTMSE FAQ page discourages it.

Hypothecation of plant, machinery, raw material, and other current assets bought with the loan amount is allowed and is standard. This is not collateral in the property sense, it is the bank taking a charge on assets that the loan is financing.

Start with the branch in writing. A short letter to the Branch Manager asking the bank to confirm the CGTMSE Cover Reference Number, and pointing out that under CGTMSE Operational Rules clause 6, no third-party immovable property collateral can be taken on a covered loan. Most branches walk it back at this stage.

If the branch does not respond in 15 working days, escalate to the Regional Office of the bank with the same letter. The Regional Manager often has a separate MSE desk and will overrule the branch.

If the Regional Office is silent, file a complaint at the CGTMSE grievance helpdesk at cgtmse.in/grievance with a copy of the sanction letter and the proof of collateral demand. CGTMSE itself does not have direct enforcement power on the bank, but the complaint becomes part of the bank's file with RBI, and a pattern of such complaints triggers a supervisory review.

A parallel route is the RBI Banking Ombudsman at cms.rbi.org.in. RBI explicitly bars banks from asking for collateral on loans up to ₹10 lakh under MUDRA and on CGTMSE-covered loans up to ₹5 crore. A complaint here is binding on the bank.

Some branches refuse to file the loan into CGTMSE in the first place, then ask for property collateral and call the file a regular secured loan. This is technically the bank's choice. CGTMSE coverage is not automatic on every MSE loan, the bank has to actively opt in.

The fix here is to switch banks. PSU banks with the highest CGTMSE filing volumes (SBI, PNB, Bank of Baroda, Canara Bank, Union Bank, Indian Bank) are more willing to file fresh cases under CGTMSE. Walking into the same bank's SME or MSE specialist branch, rather than the general retail branch, usually gets a different answer.

A second route is approaching an SFB (Small Finance Bank) or a CGTMSE-empanelled NBFC. AU SFB, Equitas, and Ujjivan SFB all run dedicated CGTMSE desks and process the cover faster than most PSU branches. The interest rate is 100 to 200 basis points higher than PSU banks, but the property-free structure is intact.

A copy of the sanction letter that says the loan is CGTMSE-covered. A copy of any letter or email from the bank asking for property collateral. The Udyam registration certificate showing the unit is micro or small. The latest loan statement showing whether the guarantee fee has been debited.

A short cover letter with three paragraphs is enough. Paragraph one states the loan account number and the date of sanction. Paragraph two cites the CGTMSE Operational Rules clause that bars collateral. Paragraph three asks the bank to either confirm the cover reference number and drop the collateral demand, or to clarify in writing that the loan is not CGTMSE-covered, in which case the borrower will exit the loan and approach another bank.