Govt to introduce collateral-free term loans for MSMEs to boost production capacity

Finance Minister Nirmala Sitharaman announced on Nov 9 that the government is prepared to introduce a term loan program that does not require collateral for MSMEs in order to increase their production capacity. The program will be presented to the Cabinet shortly.

Speaking to the industry at the National MSME Cluster Outreach Program in Bengaluru, she said the Cabinet must introduce a new credit guarantee program "sooner" in order to allow "term loans" to MSMEs.

The government is launching a term-loan facility for MSMEs to buy modern plant and machinery, following the success of the Emergency Credit Line Guarantee Scheme (ECLGS), a working capital loan facility that prevented millions of MSMEs from going bankrupt by giving them liquidity during the COVID period.

As of Dec 2023, ECLGS had provided guarantees of ₹3.68 lakh crore to more than 1.19 crore borrowers.

Sitharaman said that although MSMEs were able to obtain cheap working capital loans, they had trouble obtaining term loans.

In her address to the sector, she pointed out that although the proposed scheme will provide collateral-free guarantees for term loans up to 100 crore, a unit may borrow even more from banks.

“You don’t even need a third-party guarantee—no collateral, no third-party guarantee,” she added.

The suggested initiative is one of five important budget ideas to support the MSME sector.

“This budget provides special attention to MSMEs and manufacturing, particularly labor-intensive manufacturing. We have formulated a package covering financing, regulatory changes, and technology support for MSMEs to help them grow and also compete globally, as mentioned in the interim budget,” Sitharaman said while announcing specific measures during her Budget speech on July 23.

A credit guarantee program for MSMEs in the manufacturing sector would be implemented, according to the budget address.

"The plan will function by pooling the credit risks of these MSMEs." Each applicant will receive a guarantee cover of up to ₹100 crore from a separately established self-financing guarantee fund, albeit the loan amount may be higher.

She said that day that the borrower would be required to pay an annual guarantee cost on the decreasing loan balance in addition to an upfront guarantee fee.

The second MSME-related budget proposal that the government recently put into effect increased the Mudra loan limit for business owners who had previously taken out and successfully paid back loans.

The maximum amount of collateral-free institutional credit for small firms was quadrupled to ₹20 lakh last month for a new group of virtuous businesspeople known as "Tarun Plus," who had previously used the facility and paid back the money they had borrowed.

Additionally, under the Pradhan Mantri Mudra Yojana (PMMY), which Prime Minister Narendra Modi introduced on April 8, 2015, the number of Mudra loan recipients was increased from three to four.

According to officials, other budget ideas are being implemented at different levels.

Small Industries Development Bank of India (SIDBI) offices in MSME clusters, a new assessment model for MSME loans, and expanded opportunities for required onboarding in the Trade Receivables Electronic Discounting System (TReDS) platform to release their working capital are among the proposals.