Micro, small and medium enterprises (MSMEs) form a substantial chunk of the organized business sector in India, employing a large swathe of the population. In its Annual Report 2017-18, the MSME Ministry revealed that as of 2015-16, an estimated 63.3 million MSMEs were functioning across various sectors in India. Together, these enterprises contributed nearly 29% of India’s GDP, generating approximately 110 million (11 crore jobs) across rural and urban areas of the country.

Thus, there can be no doubt about the value of the MSME sector to the Indian economy. However, despite being such key contributors to economic development, MSMEs often suffer incredible difficulties in managing their working capital and finances.

Fortunately, recognizing these constraints and difficulties faced by the sector, the Indian government has launched various loan schemes and facilities to enable easy access to finance for MSMEs. From enabling credit guarantees to providing direct loans to entrepreneurs most in need of them, these government loan schemes exist to help small businesses who are otherwise strapped for funds.

Revised Definition of MSMEs

As part of the relief measures for MSMEs announced during COVID-19 Lockdown, the government has revised the definition of MSMEs. There was a low threshold in MSME definition earlier which left out a lot of businesses, which has now been addressed.

Existing MSME Classification
Criteria : Investment in Plant & Machinery or Equipment

Classification Micro Small Medium
Mfg. Enterprises Investment<Rs.25 lac Investment<Rs.5 cr. Investment<Rs.10 cr
Service Enterprise Investment<Rs.10 lac Investment< Rs.2 cr. Investment<Rs.5 cr.

Revised MSME Classification Composite Criteria : Investment And Annual Turnover

Classification Micro Small Medium
Manufacturing & Services Investment< Rs.1 cr. & Turnover< Rs.5cr Investment< Rs.10 cr. & Turnover< Rs.50 cr. Investment< Rs.20 cr. & Turnover< Rs.100 cr.

MSME Loan Schemes supported by Government

  1. Collateral-free automatic loans & other relief schemes during COVID-19 Lockdown

  2. Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)

  3. MUDRA Loans

  4. Stand-Up India

Collateral-Free Automatic Loans

To provide relief to millions of small businesses and reduce the impact of COVID -19 lockdown, the government has come up with the ‘Atmanirbhar Bharat’ also called as Self-Reliant India Movement, in which special economic and comprehensive packages of Rs 20 lakh crores are handed out to various sections including the MSMEs with 3 lakh crores in specific to collateral - free automatic loans.

Eligibility Criteria

Borrowers with up to Rs. 25 crore outstanding and Rs. 100 crore turnover are eligible for the loan. These loans will have a tenure period of 4 years with a moratorium of 12 months on principal repayment. Also, 100% principal and interest coverage will be given to Banks and NBFCs. One can avail the services only till 31st October 2020. The intention is not only to provide relief to MSMEs but also to cover 45 lakh units in terms of business activities and securing jobs.

Other schemes introduced to help MSMEs during Lockdown are:-

  • Subordinate Debt Holders:

For functioning MSMEs which are stressed or NPA the Government will provide them equity support of Rs. 20,000 Cr. as subordinate debt. Promoters of MSMEs will be provided debt via banks which can be further infused as promoter equity in their businesses.

  • Equity infusion through Fund of Funds: / Fund of Funds(FOF)

As COVID -19 has affected the MSMEs with severe shortage of equity, a corpus of Rs. 10 Thousand Cr. has been set up to provide funds to MSMEs with growth potential & viability.

Other Important Highlights

  1. As Indian MSMEs and other companies have always faced high competition from foreign companies, the government has decided to ban global tenders up to Rs. 200 Crores.

  2. E-market as a replacement for traditional trade fairs & exhibitions will be promoted, to solve problems of marketing and liquidity issues.

  3. Rs. 2500 crore EPF Support for Business & Workers will be provided for 3 more months. This will provide liquidity relief of Rs 2500 Cr to 3.67 lakh establishments and for 72.22 lakh employees.

  4. Also Statutory PF contribution of both employer and employee will be reduced to 10% each from existing 12% each for all establishments covered by EPFO for next 3 months.

To know more on Self-Reliant India Movement & Schemes to MSMEs Businesses

Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)

The Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE) was launched by the Government of India (GoI) on 30th August 2000 to make collateral-free credit available to the MSME sector. Both new and existing enterprises are eligible for this loan coverage. Under the scheme, the MSME Ministry and the Small Industries Development Bank of India (SIDBI) established a trust named the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to implement the Credit Guarantee Scheme.

As of 31st May 2016, 133 institutions have been registered with the CGTMSE as Member Lending Institutions (MLIs), including 26 public sector banks, 21 private sector banks, 73 regional rural banks (RRBs), four foreign banks, and 9 ‘other’ institutions. The loans sanctioned by these MLIs to MSMEs are provided guarantee cover upto a certain percentage under this scheme so that they can lend without collateral or any third party guarantee. Under CGTMSE, MSMEs can avail of term loans and/or working capital loans up to Rs. 1 crore.

Guarantee Cover

CGTMSE guarantees a certain percentage of the loan amount in case of default based on the range in which the amount falls.

Loan Amount Range % Guarantee Cover Maximum Guarantee Cover
Upto Rs 5 Lakh 85% of the loan amount Rs 4.25 Lakh
Above Rs 5 Lakh upto Rs 50 Lakh 75% of the loan amount Rs 37.5 Lakh
Above Rs 50 Lakh upto Rs 100 Lakh 75% upto 50 Lakh, and 50% of the remaining amount Rs 62.5 Lakh

Guarantee Fee and Annual Service Fee

A Member Lending Institution under CGTMSE has to pay a one time guarantee fee and an annual service fee to the trust within a stipulated period of time else it will not be eligible for guarantee cover for that particular loan. The guarantee fee is 1% for loans upto Rs 5 Lakh and 1.5% for loans above Rs 5 Lakh. Besides this, an annual service fee of 0.5% upto Rs 5 Lakh and 0.75% for loans above Rs 5 Lakh is also to be paid to the trust every year. The lending institution can recover this amount from the borrower at its discretion.

Apply for loan under CGTMSE

To apply for a loan under CGTMSE, you should submit your business plan to one of the 133 MLIs covered by the Scheme. The banks will sanction the loan as per their policies and guidelines, and then apply for CGTMSE cover for the sanctioned loan. Once approved, you will be eligible under the CGTMSE scheme and will be required to pay the relevant guarantee and service fee if required by your lending institution.

Apply for Invoice factoring with drip capital

MUDRA Loan Scheme

Possibly the most widely-known government loan scheme for small businesses is MUDRA (Micro-Units Development & Refinance Agency Ltd.) launched under the Pradhan Mantri Mudra Yojana or PMMY. Launched in April 2015 as a wholly owned subsidiary of SIDBI, MUDRA aims to develop and refinance the MSME sector by supporting the financial institutions lending to micro and small business entities engaged in manufacturing, trading and service activities. For this purpose, the Agency partners with banks, Micro Finance Institutions (MFIs), and other lending institutions at the state and regional levels to provide microfinance support to MSMEs in the country.

MUDRA offers loans under three tiers "Shishu", "Kishor" and "Tarun". These categories signify the stage of development of the business entity and accordingly their funding requirements have been defined.

Category Loan Amount Interest Rate
Shishu Upto Rs 50,000 10-12%
Kishor Between Rs 50,000 and Rs 5 Lakh 14-17%
Tarun Between Rs 5 Lakh and Rs 10 Lakh 16%

More impetus has been given to units which come under Shishu category to promote entrepreneurship among aspiring youth of the country.

MUDRA provides MSME Loans in two forms:

  • Micro Credit Scheme (MCS)
  • Refinance Scheme for Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks and Non Banking Financial Institutions (NBFCs)

Micro Credit Scheme (MCS)

Under Micro Credit Scheme Mudra offers business loans upto Rs 1 Lakh through Micro Finance Institutions (MFIs) to small businesses. These loans are given to self help groups, joint liability groups and individuals for the purpose of developing a micro enterprise and promote small business activities.

Refinance Scheme for Banks and NBFCs

Different Financial Institutions such as Commercial Banks, Regional Rural Banks (RRBs), Small Finance Banks and Non Banking Financial Institutions (NBFCs) can avail refinance from MUDRA if they are financing MSMEs through business loans or working capital loans upto Rs 10 Lakhs.

Apply for Mudra Loan

You can apply for a MUDRA business loan by approaching a financial institution like a leading public or private-sector bank in-person or on their websites. You will need supporting documents like an ID proof, address proof, and proof of business to support your application. Fill in the loan application form for the tier/loan amount you need, furnishing your personal and business details to the bank. Once approved, the sanctioned loan amount will be deposited in your account.

You can now also apply for MUDRA Loan online. On the Udyamimitra website applicant has to register, fill in the application form and then apply to their preferred lender. The application shall be viewed by the lenders and they'll approach the applicant for his funding requirement.

Aimed at covering as large a chunk of MSMEs as possible, MUDRA loans can cover a variety of requirements, including, but not limited to, business loans for vendors, traders, shopkeepers, and other service sector activities; working capital loans through MUDRA Cards; equipment finance for micro-units; transport vehicle loans, etc.

Stand Up India Scheme

According to the MSME Ministry, 20.4% of all Indian MSMEs are run by women, and 66.2% of Indian MSME businesses are run by people from “socially backward groups”. Given these high numbers, and the marginalization often faced by members of these communities, the Indian government has taken steps to ensure these entrepreneurs receive easy and fair access to finance for their business. One such initiative is the Stand Up India loan scheme.

Launched in April 2016 as a sibling scheme to Prime Minister Narendra Modi’s flagship Startup India scheme, Stand Up India offers bank loans of between Rs. 10 lakh and Rs. 1 crore for scheduled castes and scheduled tribes and women setting up new businesses outside the farm sector.

The Scheme offers a composite loan (inclusive of term loans and working capital) for up to 75% of the cost of setting up the business. Collateral-free, the Stand-Up India loan may be secured by the issuing bank by security or guarantee under the Credit Guarantee Fund Scheme for Stand-Up India Loans (CGFSIL), with a maximum interest rate of Base/MCLR + 3% +Tenure premium. The loan is repayable in seven years, with a maximum moratorium period of 18 months.

Eligibility Criteria

Any adult Indian woman or SC/ST member above 18 years of age is eligible to apply for this loan. The loan is available to these entrepreneurs to set up a greenfield (first-time) enterprise in the manufacturing, services, and/or trading sectors. In case of entities with more than 1 owner, 51% of the shareholding should be held women or SC/ST members.

Apply for Stand-Up India Loan

Eligible entrepreneurs can apply for the Stand-Up India loan online, or directly through a partner-lender. If applying online, the applicant has the option to choose the degree of “handholding support” needed, and the portal will take you through the application step by step.

Other MSME Loan Schemes

The three schemes mentioned above are the biggest government initiatives to finance the Indian MSME sector. However, apart from these, there are also other smaller initiatives, as listed below:

59-minute loan scheme

Launched in November 2017, the scheme aims to make disbursal of loans much faster. Under the scheme, loans may be “approved” for an applying MSME in under 59 minutes, but the actual disbursal of the loan can still take up to a week. Loans are available for Rs. 10 lakh to Rs. 1 crore, with rates of interest starting from 8% onwards.

National Small Industries Corporation (NSIC) Subsidies

The NSIC offers assistance to MSMEs for raw material procurement and marketing through the Raw Material Assistance and Marketing Assistance Schemes respectively. Amounts to be disbursed are taken on a case-by-case basis, with rates of interest varying between 9.5-11%.

Credit Linked Capital Subsidy Scheme for Technology Upgradation

This Scheme, under the aegis of the MSME Ministry, aims to facilitate technology upgradation in MSMEs by providing an upfront capital subsidy of 15% (on institutional finance of up to Rs. 1 crore availed by them) for induction of well-established and improved technology in 51 specified and approved sub-sectors/products. Any business with a valid UAM is eligible to apply for this loan for upto Rs. 15 lakh given at prime lending rate of the lending institution.

An alternative option for working capital finance

The above initiatives, while well-intentioned, often fall short of the real-world requirements of the MSME sector on account of bureaucracy and red tape. Financial institutions often take too long to disburse sanctioned loans, rates of interest are frequently exorbitant, and you end up benefiting very little from these schemes. Also, these schemes offer incentives to banks and other financiers to provide credit to MSMEs, rather than offer loans directly to you. This arrangement often fails to address the bureaucratic hurdles faced by you and can do more harm than good.

In such a scenario, MSME entrepreneurs -- especially exporters -- need alternative channels of funding to manage their working capital. For example, Drip Capital is a US-based trade finance company, leveraging technology to provide collateral-free post-shipment finance to SME exporters with instant approvals and minimal documentation. By applying through financing options like Drip, MSME exporters and entrepreneurs like yourself can get access to the working capital you need easily, without facing the troubles posed by the abovementioned government schemes.

The Indian government is all-too-aware of the problems facing the country’s burgeoning MSME sector, and as the above schemes show, it is taking steps to facilitate access to credit for the sector. However, so long as the country’s financial institutions are embroiled in bureaucracy, it is difficult for these schemes to have their maximum impact. The government needs to take steps to cut down the red tape next -- until then, India’s MSMEs need to rely on alternative financing solutions like bill discounting and invoice factoring to access the working capital they so desperately need.

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Apply for working capital loan for exporters