Banking and Insurance - Laws and Practice · Various Government Schemes

Credit Guarantee and Priority Sector Support Schemes

Updated 11 October 2026 · Fact-checked

These schemes help banks lend to priority sectors by sharing risk or cutting borrowing cost. Credit guarantee schemes such as CGTMSE cover part of a bank's loss on default. The Kisan Credit Card gives farmers flexible short-term credit. Interest subvention lowers the interest the borrower pays. Answer by scheme, purpose, beneficiary, support and limits.

Understand Credit Guarantee and Priority Sector Support Schemes

Banks hesitate to lend to small borrowers. They lack collateral, their records are thin and the risk looks high. The government steps in with schemes that make such lending safer or cheaper for the bank and the borrower.

There are three broad tools. Credit guarantee means a fund promises to pay the lender a share of the loss if the borrower defaults. Interest subvention means the government pays part of the interest, so the borrower pays a lower rate. Special credit products such as the Kisan Credit Card (KCC) give a standard, easy way for a target group to borrow.

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) was set up by the Government of India and SIDBI. It offers guarantee cover to lenders for collateral-free loans to micro and small enterprises. The borrower need not give collateral or a third-party guarantee, and the lender pays a guarantee fee. Cover is a percentage of the loan and the percentage varies with the borrower category and loan size. Check the current scheme circular for exact percentages, ceilings and fees, since they are revised from time to time.

The Kisan Credit Card lets farmers draw working capital for crops and related needs through a revolving limit, with the limit set from the scale of finance and the cropping pattern. It has been extended to animal husbandry and fisheries. The Modified Interest Subvention Scheme has given farmers short-term crop loans at a concessional rate, with the government paying part of the interest and often an added incentive for prompt repayment. Rates and caps change, so state them only as the current scheme provides.

All of this links to priority sector lending (PSL). RBI directs banks to lend set shares of their credit to sectors such as agriculture, MSMEs, education, housing and weaker sections. The schemes above help banks meet those targets without carrying all the risk.

Key rules to remember

Credit guarantee logic: Lender's loss covered = guarantee % × outstanding default amount (as per the scheme's terms); The percentage and ceiling depend on the current scheme circular. Quote them only if you are sure.
Interest subvention effect: Effective rate to borrower = lending rate − subvention rate; Applies for the period and conditions the scheme specifies, such as timely repayment.
Simple interest on a short-term loan: Interest = P × r × t ÷ 100; Use for crop loan illustrations with t in years, for example 6 months = 0.5.
Scheme answer frame: Objective → Beneficiary → Support offered → Conditions → Limits; Use this order for any scheme question.

How to solve Credit Guarantee and Priority Sector Support Schemes questions

Use one frame for every scheme question so that you cover all points the examiner looks for.

1Identify the scheme and the problem it solves, such as lack of collateral or high interest cost.
2State who is eligible, for example micro and small enterprises or farmers and tenant farmers.
3Name the support type: guarantee cover, revolving credit limit or interest subvention.
4Give the key conditions, such as no collateral up to the scheme ceiling, a guarantee fee, or prompt repayment for subvention.
5If numbers are given, compute step by step, for example rate after subvention or interest for the period.
6Link to priority sector lending and the role of RBI, the lending banks and the implementing agency.
7Close with a one-line conclusion on how the scheme advances financial inclusion or credit flow.

Quickest way: Four-line scheme answer

When to use it: Use for short notes and for the first part of a case question when time is limited.

Line 1: what the scheme is and who runs it.
Line 2: who benefits.
Line 3: what support the bank or borrower gets.
Line 4: the main condition and the link to priority sector lending.

Common mistakes in Credit Guarantee and Priority Sector Support Schemes

Saying CGTMSE pays the borrower or gives subsidy to the borrower.
Students mix guarantee with subsidy.
Fix: CGTMSE guarantees the lender against loss. The borrower still must repay the loan.
Treating interest subvention as a loan waiver.
Both reduce the borrower's burden, so they look alike.
Fix: Subvention only reimburses part of the interest to the lender. The principal remains payable.
Quoting exact guarantee percentages, limits or rates from memory.
Students memorise figures from old notes.
Fix: Figures are revised. State them only if sure and otherwise describe the feature, saying it is as per the current scheme.
Limiting Kisan Credit Card to crop loans only.
Older descriptions focus on crop finance.
Fix: Mention that its coverage was extended to animal husbandry and fisheries, and that it works as a revolving limit.
Ignoring the priority sector link.
Students treat each scheme as stand-alone.
Fix: Add a line on how the scheme helps banks meet RBI priority sector targets.

Worked examples

Example 1

A bank sanctions a ₹20,00,000 collateral-free loan to a micro enterprise, covered by a credit guarantee scheme with 75% cover on the default amount. The account turns bad with ₹16,00,000 outstanding. Compute the amount claimable under the guarantee and explain the borrower's position.

Show the solution

Cover applies to the outstanding default amount: ₹16,00,000.
Claimable amount = 75% × ₹16,00,000 = ₹12,00,000.
Balance loss borne by the bank = ₹16,00,000 − ₹12,00,000 = ₹4,00,000.
The guarantee does not release the borrower. The bank can still pursue recovery.

Answer: The bank can claim ₹12,00,000 and bears ₹4,00,000. The borrower remains liable for the full dues. The 75% is an assumed figure for this question.

Example 2

A farmer takes a crop loan of ₹3,00,000 for 6 months at 7% a year. Government interest subvention of 1.5% a year applies for the period, as given in the question. Find the interest the farmer bears, and the subvention amount.

Show the solution

Interest at 7%: 3,00,000 × 7 × 0.5 ÷ 100 = ₹10,500.
Subvention at 1.5%: 3,00,000 × 1.5 × 0.5 ÷ 100 = ₹2,250.
Interest borne by farmer = ₹10,500 − ₹2,250 = ₹8,250.
Check: effective rate 5.5%: 3,00,000 × 5.5 × 0.5 ÷ 100 = ₹8,250.

Answer: The farmer bears ₹8,250 interest. The government reimburses ₹2,250 to the lender.

Exam tips

Write scheme answers in the order objective, beneficiary, support, conditions, limits.
Use the figures in the question. Do not import rates or limits that are not stated.
Always say who bears the risk: the guarantee fund shares the lender's loss but the borrower stays liable.
Add one line linking the scheme to priority sector lending and financial inclusion.
In case questions, advise the bank on the correct scheme for the borrower described.

Practice questions from Various Government Schemes

Credit Guarantee and Priority Sector Support Schemes: frequently asked questions

What is the CGTMSE scheme in simple terms?

It is a guarantee scheme for loans to micro and small enterprises. If the borrower defaults, the trust compensates the lender for a share of the loss. This lets banks lend without collateral or a third-party guarantee.

Who can get a Kisan Credit Card?

Farmers who cultivate land, including tenant farmers and sharecroppers, are eligible, and the scheme has been extended to those in animal husbandry and fisheries. The limit depends on the scale of finance and the farming needs. Check the current bank guidelines for details.

What is interest subvention?

It is a government payment that covers part of the interest on certain loans. The borrower pays a lower effective rate. The principal is not waived.

How do these schemes relate to priority sector lending?

RBI sets priority sector targets for banks. Guarantees and subvention make loans to agriculture and small businesses safer and cheaper, so banks find it easier to meet those targets.