What a CGC guarantee does to your bank’s risk assessment, who pays the fee, and why you still owe the full amount.
A Credit Guarantee Corporation guarantee protects the bank. It does not protect you. That is the whole of the misunderstanding, and it is worth stating in the first line because a surprising number of borrowers sign up believing that if the business fails, CGC settles the debt and they walk away. It does not work like that, and the difference matters most at exactly the moment nobody wants to be reading the fine print.
Credit Guarantee Corporation Malaysia Berhad was set up in 1972 to help SMEs that are commercially viable but short of the collateral banks want. It is owned by Bank Negara Malaysia together with the commercial banks, in proportions to be confirmed. Syarikat Jaminan Pembiayaan Perniagaan, usually shortened to SJPP, performs a similar function under government-backed schemes, and a bank may route a file to either.
In the context of a bank facility, CGC is a guarantor. It is not the lender, it does not set your rate, and it does not approve your facility. The bank does all three. CGC’s role begins when the bank has already decided it wants to lend and needs to reduce what it stands to lose.
A guarantee covers an agreed percentage of the bank’s loss on the facility, payable to the bank if the facility goes into default and the bank makes a claim. Cover typically runs from 30% to 90% depending on the scheme, with a higher percentage available on the secured portion of a facility and a lower percentage, subject to a ringgit cap of the current maximum cover on the unsecured portion, on the part that has no security behind it.
Three consequences follow, and they are the ones borrowers miss.
If you take nothing else from this page: the guarantee changes what the bank loses if you cannot pay. It does not change what you owe, and it does not remove the directors’ personal exposure where personal guarantees have been signed.
Banks think about two separate questions. How likely is this borrower to default, and how much would we lose if they did. A guarantee only touches the second question.
By reducing the loss the bank would suffer, a guarantee changes the capital the bank must hold against the exposure and the provisioning it expects to make. That is what allows a credit officer to approve a file that is sound on the business but thin on security. It is a genuine and useful effect, and for asset-light businesses it is often the difference between a decline and an approval.
What it does not touch is the likelihood of default. Your account conduct, your CCRIS record, what CTOS shows on the company and the directors, your gearing and whether the cash flow covers the instalment are all assessed exactly as they would be without a guarantee. If the file fails on repayment capacity, it fails with a guarantee attached. A bank may be entirely right to decline in that situation, and pushing a guarantee scheme at it will not help. Our guide on why banks decline SME applications deals with the causes that a guarantee cannot fix.
The borrower pays. The fee is charged on the guaranteed portion, usually annually, and it sits on top of the bank’s interest or profit rate. Current rates vary by scheme, by the risk grade the guarantor assigns and by whether the portion is secured or unsecured, and the published ranges are the current CGC guarantee fee ranges for secured and unsecured portions, and the equivalent for SJPP schemes.
Two points on cost. First, under some subsidised facilities the rate ceiling is expressed as inclusive of the guarantee fee, so the fee comes out of what the bank can charge rather than being added to it. Second, when you weigh the fee, the comparison is not against a facility with no fee. It is against the alternatives actually in front of you, which are usually a smaller facility, a facility secured on property you would rather not pledge, or no facility at all.
Banks do not value security at market price. They apply a haircut, then compare the discounted value against the facility. What is left over is the unsecured gap, and the unsecured gap is what worries the credit committee.
| Step | What the bank is doing |
|---|---|
| Facility requested | The amount you have asked for |
| Security offered, after haircut | Discounted value of property, deposits or other charged assets |
| Unsecured gap | The exposure with nothing behind it |
| Guaranteed portion | Part of that gap covered by CGC or SJPP, subject to the scheme cap |
| Residual exposure | What the bank still stands to lose, and what it is really deciding on |
Because the cover on the unsecured portion is capped in ringgit, a guarantee closes the gap completely on smaller facilities and only partially on larger ones. A business asking for a large working capital line with no property behind it will still be asked for security, or for a smaller limit. If working capital is what you are after, our explanation of working capital facilities sets out what banks look at before the question of security arises.
It fits where the business is sound and the security is not. Typical cases are a trading or service company with good receivables and no property, a manufacturer whose machinery the bank will not take as primary security, and directors who are unwilling to charge the family home. If a banker has said something close to we like the business but we cannot take this unsecured, that is the signal.
It is the wrong tool in four situations. Where the decline was about conduct or arrears rather than security. Where the financials do not support the instalment. Where the business is newer than the scheme’s minimum trading history, commonly the current minimum period of operation under the relevant scheme. And where you are trying to refinance an existing facility under a scheme that excludes refinancing, which many do.
Through the bank, not directly. You raise your facility application with a participating bank in the normal way. If the bank wants to lend and identifies a security shortfall, it submits the file to CGC or SJPP itself. The guarantor assesses it and responds to the bank, and the bank comes back to you. You cannot compel a bank to route your file, and a bank that does not want the exposure at all will not route it.
This is also why the choice of bank matters. Participation differs between institutions and between schemes, so a file one bank will not route, another may. The same is true of the BNM facilities these guarantees often sit alongside, which we cover in BNM SME financing schemes. If you are still deciding what shape of facility you need, a term loan or an overdraft is the first question to settle.
Scheme names, cover percentages, fees and eligibility rules are revised regularly. Treat anything specific in this article as a starting point to check rather than as current terms, and confirm the position for your own case before committing. You can see the facilities we prepare applications for if you want to work backwards from the facility to the scheme.
Yes, in full. The guarantee is an arrangement between the bank and the guarantor covering part of the bank’s loss. Your loan agreement with the bank is unchanged and you remain liable for the entire amount, plus interest or profit and any charges.
If the guarantor pays out on a claim, that does not clear your debt. The guarantor generally takes over the right to recover from the borrower, so the obligation continues, only to a different institution.
For a guarantee attached to a bank facility, no. The bank submits the file to the guarantor once it has decided it wants to lend and has identified a shortfall in security. The guarantee is issued in the bank’s favour, so the bank is the applicant.
If a bank will not put your file forward, the practical route is a different bank rather than an approach to the guarantor.
Usually yes. Most banks ask directors or substantial shareholders for personal guarantees on SME facilities regardless of whether a scheme guarantee is in place, because the two cover different things. The scheme guarantee reduces the bank’s loss; the personal guarantee keeps the people running the business accountable for it.
Whether one is required in your case is a matter for the bank’s own credit terms, and it should be clear in the letter of offer before anything is signed.
The borrower pays an annual fee on the guaranteed portion. The rate depends on the scheme, the risk grade assigned and whether the portion is secured or unsecured, so there is no single figure. Current ranges should be confirmed with the bank, as they are revised from time to time.
You avoid the fee by not needing the guarantee, which in practice means offering security the bank accepts. That is a real choice for some businesses and no choice at all for others.
If you want to work out what this means for your own application rather than in general, that is what the first conversation is for. It costs nothing and we will tell you if the answer is that you are not ready.
How Bank Negara’s SME funds reach you through participating banks, who meets the SME definition, and the conditions that most often disqualify an application.
The six reasons credit officers actually decline SME files, whether each one can be fixed, and roughly how long fixing it takes.
The facilities Malaysian banks actually offer for working capital, what security they take, and how a credit officer arrives at your limit.