Part 03 — Products
Guarantees, LC & Schemes
Non-funded products are credit products even when no cash leaves the bank on day one. A bank guarantee (BG) can become a funded exposure immediately on invocation. A letter of credit (LC) can crystallise into buyer credit if the applicant does not fund payment. For SMEs, these products unlock contracts, purchases and performance obligations, but they need the same borrower, security, limit and monitoring discipline as loans.
RBI’s Master Circular - Guarantees and Co-acceptances, April 1, 2024 consolidated instructions for scheduled commercial banks up to March 31, 2024. The 2025 consolidated non-fund based directions were issued after draft consultation, but the verified current working official link available during this task was the 2024 Master Circular and the RBI master-circular index listing the 2025 commercial-banking master circular. Where a lender is implementing new or renewed non-fund facilities after April 2026, compliance teams should check the current RBI Non-Fund Based Credit Facilities Directions directly before policy finalisation.
BG and LC Parameters
Section titled “BG and LC Parameters”| Product | Purpose | Typical SME ticket | Tenor | Charges and margin | Practical risk |
|---|---|---|---|---|---|
| Performance BG | Contract performance, government tender, EPC/service obligation | ₹5 lakh-₹25 crore | 3 months-5 years, sometimes longer | 0.75%-3% p.a.; cash margin 5%-25%; collateral/limits | Invocation despite commercial dispute |
| Financial BG | Payment/security deposit, statutory dues, lease/rent/security obligation | ₹2 lakh-₹10 crore | 3 months-3 years | Higher margin and stricter appraisal than performance BG | Direct payment obligation |
| Earnest money deposit/tender BG | Bid participation | ₹50,000-₹5 crore | 1-6 months | Low commission; cash margin often high for small borrowers | Bid terms and auto-extension |
| Inland LC | Purchase of goods from domestic supplier | ₹5 lakh-₹50 crore | 30-180 days | LC commission 0.25%-2% p.a. equivalent; margin 5%-25% | Goods dispute, devolvement |
| Usance import LC | Import machinery/raw material | ₹10 lakh-₹50 crore | 30-360 days | LC + forex + bank charges; margin varies | FX, shipping, customs, supplier risk |
A BG limit is usually sanctioned as part of the overall borrower exposure. The lender checks contract, beneficiary, invocation clause, claim period, margin, counter-indemnity, board/partner authority, security and whether the guarantee is open-ended. Good operations teams track expiry date and claim-expiry date separately; an expired performance period may still have a live claim period.
For LCs, RBI’s guarantee circular precautions include that banks should open LCs and negotiate/purchase/discount bills under LCs only for genuine commercial and trade transactions of borrower constituents with sanctioned regular credit facilities, with limited exceptions for restricted negotiation where proceeds go to the beneficiary’s regular banker (RBI Master Circular - Guarantees and Co-acceptances, April 1, 2024). In 2018, RBI discontinued Letters of Undertaking and Letters of Comfort for trade credits for imports, while allowing LCs and bank guarantees for trade credits subject to applicable master circular provisions (RBI A.P. DIR Circular No. 20, March 13, 2018).
CGTMSE-Covered Products
Section titled “CGTMSE-Covered Products”The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), set up by the Government of India and SIDBI, provides guarantee cover to member lending institutions for eligible MSE credit. It is not a borrower subsidy and not a replacement for underwriting.
As of July 2026, CGTMSE states that fund and non-fund facilities including letters of credit and bank guarantees up to ₹10 crore per eligible borrower can be covered when extended on project viability without collateral or third-party guarantee. For credit above ₹10 crore, cover is restricted to ₹10 crore and maximum credit risk borne is ₹7.5 crore, i.e. 75% of amount in default (CGTMSE Credit Facilities & Parameters). The revised Annual Guarantee Fee (AGF) effective for guarantees approved or renewed on or after April 1, 2025 ranges from 0.37% p.a. for ₹0-10 lakh to 1.20% p.a. for above ₹8 crore-₹10 crore before discounts/risk premium (CGTMSE Fee Structure).
| Category | Maximum coverage |
|---|---|
| Micro enterprise credit up to ₹5 lakh | 85% |
| General MSE category | 75% |
| Women entrepreneurs / Agniveer-promoted MSEs | 90% |
| SC/ST, person with disability, aspirational district, ZED-certified MSEs | 85% |
| North East Region, Jammu & Kashmir, Ladakh | 80% |
| Identified Credit Deficient Districts | Additional 5% over applicable coverage from December 15, 2023 |
Operationally, CGTMSE files need scheme category, borrower eligibility, Udyam, covered facility, hybrid-security flag, fee payment, guarantee start date, renewal, NPA date, recall/legal action and claim status. CGTMSE also lists June 15, 2026 circulars for special provision on credit facilities on TReDS and Micro Credit Card changes, so lenders should check the live circular page for scheme operations before launching new variants (CGTMSE Circulars).
MUDRA / PMMY
Section titled “MUDRA / PMMY”Pradhan Mantri MUDRA Yojana (PMMY) is a micro-enterprise lending scheme originated by member lending institutions such as banks, small finance banks, NBFCs, MFIs and NBFC-MFIs. It is not collateral-based lending. The Department of Financial Services page says PMMY was launched on April 8, 2015 for collateral-free institutional credit to micro enterprises, for non-agricultural income-generating activities including allied activities such as poultry, dairy and beekeeping. Categories are Shishu up to ₹50,000, Kishore above ₹50,000 up to ₹5 lakh, Tarun above ₹5 lakh up to ₹10 lakh, and Tarun Plus above ₹10 lakh up to ₹20 lakh for entrepreneurs who successfully repaid a previous Tarun loan, effective October 24, 2024 (DFS PMMY page). PIB separately confirmed the October 25, 2024 increase of the MUDRA limit from ₹10 lakh to ₹20 lakh and CGFMU guarantee coverage for PMMY loans up to ₹20 lakh (PIB, October 25, 2024).
| MUDRA category | Loan amount | Typical borrower |
|---|---|---|
| Shishu | Up to ₹50,000 | Very small shop, artisan, street/service activity |
| Kishore | Above ₹50,000 to ₹5 lakh | Growing micro unit needing tools, stock, working capital |
| Tarun | Above ₹5 lakh to ₹10 lakh | Established micro business expanding capacity |
| Tarun Plus | Above ₹10 lakh to ₹20 lakh | Borrower with successful repayment history under Tarun |
For system design, store MUDRA category, PMMY flag, CGFMU/guarantee status, end-use, social category where required, disbursement purpose and claim identifiers separately from the base product. A ₹7 lakh Tarun loan could be a term loan, working-capital loan or composite facility; the scheme wrapper does not remove normal underwriting.
Sources
Section titled “Sources”- RBI, Master Circular - Guarantees and Co-acceptances, April 1, 2024
- RBI, Discontinuance of LoUs and LoCs for Trade Credits, A.P. DIR Circular No. 20, March 13, 2018
- CGTMSE, Credit Facilities & Parameters
- CGTMSE, Extent of Guarantee Coverage
- CGTMSE, Fee Structure effective April 1, 2025
- CGTMSE, Circulars
- Department of Financial Services, Pradhan Mantri MUDRA Yojana
- PIB, MUDRA loan limit increased to ₹20 lakh, October 25, 2024