Banks often hesitate to lend to young FPOs because they have no collateral. The scheme's Credit Guarantee Fund (CGF) answers this: if a lender gives a loan without collateral, the fund guarantees most of it. This part explains the cover, who can lend, the fee and the claims, with a calculator.
The short version
- The fund guarantees collateral-free loans to FPOs: 85% of loans up to ₹1 crore, 75% of loans from ₹1 crore to ₹2 crore.
- The fund is up to ₹1,500 crore: ₹1,000 crore with NABARD and ₹500 crore with NCDC.
- The lender applies for the cover, not the FPO, by the end of the quarter after the loan is sanctioned.
- FPOs formed before the scheme can use it too, under the same rules.
How the Guarantee Works
The lender gives a loan without collateral or third-party guarantee, and the fund covers 75% to 85% of it if the FPO defaults.
The aim is to bring bank credit to FPOs by reducing the lender's risk. The guarantee applies only to loans given without any collateral security or third-party guarantee, including personal guarantees of the directors.
It can cover a term loan, working capital or both. The lender may lend more, but the cover is limited as below.
| Project loan | Guarantee cover | Maximum cover |
|---|---|---|
| Up to ₹1 crore | 85% of the loan | ₹85 lakh |
| Above ₹1 crore, up to ₹2 crore | 75% of the loan | ₹150 lakh |
| Above ₹2 crore | Only the first ₹2 crore is covered | ₹150 lakh |
This interactive tool needs JavaScript. The rules it applies are set out in the text of this episode.
Source: Operational Guidelines 12.1 to 12.6 and 12.8
Did you know?The Addendum widened the NBFCs that can lend under the guarantee from AAA-rated only to AAA, AA+ and AA.
Which Fund and Which Lenders
Companies use NABARD's fund; cooperatives can use NABARD's or NCDC's. Banks, RRBs, cooperative banks and highly rated NBFCs can lend.
The fund is up to ₹1,500 crore: up to ₹1,000 crore with NABARD and up to ₹500 crore with NCDC, with DA&FW contributing a matching share each year. FPOs registered as companies use NABARD's fund; cooperatives may use either.
Banks
Scheduled commercial banks, Regional Rural Banks and cooperative banks.
Cooperative lenders and NEDFI
Cooperative credit societies and the North Eastern Development Finance Corporation.
NBFCs
Rated AAA, AA+ or AA, with the required net worth and track record, lending at a moderate margin.
Federations too
Federations of FPOs covered by the scheme can also borrow with the guarantee.
Source: Operational Guidelines 4.6, 12.3 to 12.6; Addendum items 16 and 17
Applying, Fees and Claims
The FPO applies to the lender; the lender applies to NABARD or NCDC; the lender pays a yearly fee and can claim if the loan turns bad.
- Loan application. The FPO applies to the lender with its project and business plan.
- Appraisal and sanction. The lender appraises the project and sanctions the loan without collateral.
- Guarantee application. The lender applies to NABARD or NCDC on the form in Annexure II before the end of the next quarter. A loan sanctioned in April to June must be submitted by September.
- Sanction of cover. The fund's Investment and Claims Settlement Committee sanctions the cover, and the lender signs an agreement at branch level.
- Fee. If charged, a yearly fee of up to 0.75% (loans up to ₹1 crore) or 0.85% (₹1 to ₹2 crore) on the outstanding amount, paid by the lender within 30 days of the sanction letter.
- Claim. If the loan becomes a non-performing asset, the lender may invoke the guarantee within one year, and claims are settled up to 85% or 75% of the amount in default.
A lender can take the cover for the same FPO at most twice in five years. Being paid a claim does not free the lender from recovering the full loan, and defaulting borrowers' names may be published.
Source: Operational Guidelines 12.8 to 12.13
Loans That Are Not Covered
Secured loans, loans already covered elsewhere, overdue or restructured loans, and penal charges are outside the guarantee.
- Loans given against collateral or a third-party guarantee.
- Loans whose risk is already covered by another government, RBI or insurance scheme.
- Loans that break any law or RBI direction.
- Loans that are overdue, taken over as NPAs from another lender, or restructured after becoming overdue.
- Penal interest, commitment charges, service charges and other costs beyond the contracted interest.
FPOs formed before the scheme can also use the credit guarantee; the Addendum confirms that clause 12 applies to them.
Source: Operational Guidelines 12.7 and 12.8(iv); Addendum item 5
Check yourself
Tap an answer to see whether you are right, and why.
A bank lends ₹80 lakh without collateral. What is the guarantee cover?
- ₹60 lakh
- ₹68 lakh
- ₹80 lakh
Loans up to ₹1 crore get 85% cover: 85% of ₹80 lakh is ₹68 lakh.
Who applies for the guarantee cover?
- The FPO
- The lender
- The CBBO
The eligible lending institution applies to NABARD or NCDC (clause 12.9).
The FPO pledges its warehouse as security for the loan. Is the loan covered?
- Yes
- No, covered loans must be collateral-free
- Only half of it
Clause 12.7 excludes loans given against collateral or third-party guarantee.
Remember these things
- 85% cover up to ₹1 crore; 75% from ₹1 to ₹2 crore; at most ₹150 lakh.
- NABARD (₹1,000 crore) and NCDC (₹500 crore) run the fund.
- The lender applies by the end of the next quarter and pays the fee.
- Only collateral-free, regular loans are covered.
Part 14 lists the other schemes an FPO can combine with this support. For FPOs whose members are also certified under PGS-India, KrushiFlow submits farmer records to the PGS-India portal in bulk.