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To improve credit flow to the SME sector, the government-appointed Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) acts as a guarantor to loans up to Rs 1 crore. CGTMSE charges the above-mentioned twin fees to borrowers.
"The fees are basically a kind of insurance premium. To help clients we have now decided to pay up to the Trust from our books," managing director for national banking, A Krishna Kumar, told PTI here. The decision was taken two weeks ago.
The Trust, which came into being four years ago, charges a guarantee fee ranging from 1 to 1.5 per cent of the loan amount while the annual service fee ranges from 0.50-0.75 per cent.
Kumar parried a question on the financial implication of the move on the bank`s balancesheet, but said this is a long-term arrangement, not a short-term move to lure customers.
Explaining the rationale, Kumar said the presence of such a commission clause dissuades "good borrowers" who feel it is unnecessary to take the extra burden in loan servicing.
Additionally, paying up the fees from the bank`s own books will act as a "psychological deterrent" to the bank`s staff, who can become complacent as the Trust stands guarantor to such loans, Kumar said.
If a loan turns bad, CGTMSE pays back 75 per cent for the principal to the lending bank and an additional up to 15 per cent depending on the case, Kumar said.
