Finance Minister Nirmala Sitharaman announced on Saturday 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 stated that 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 on December 2023, ECLGS issued guarantees to over 1.19 crore borrowers involving ₹3.68 lakh crore.
On Saturday, Sitharaman stated that although MSMEs were able to obtain cheap working capital loans, they had trouble obtaining term loans. In her address to the sector, she stated 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. She continued by saying, “You don’t even need a third-party guarantee, no collateral, no third-party guarantee.”
The proposed scheme is part of the five key budget proposals to boost the MSME sector. “This budget provides special attention to MSMEs and manufacturing, particularly labour-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,” the FM said while announcing specific measures during her Budget speech on July 23.
The budget speech said a credit guarantee scheme for MSMEs in the manufacturing sector would be introduced. “The scheme will operate on pooling of credit risks of such MSMEs. A separately constituted self-financing guarantee fund will provide, to each applicant, guarantee cover up to ₹100 crore, while the loan amount may be larger. The borrower will have to provide an upfront guarantee fee and an annual guarantee fee on the reducing loan balance,” she said that day.
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.
Other budget proposals are under various stages of implementation, officials said. Proposals include new assessment model for MSME credit, Small Industries Development Bank of India (SIDBI) branches in MSME clusters, and enhanced scope for mandatory onboarding in Trade Receivables Electronic Discounting System (TReDS) platform to unlock their working capital.
