Understand Credit Guarantee Scheme for MSMEs
- February 10, 2025
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Understand Credit Guarantee Scheme for MSMEs
The Credit Guarantee Scheme has been grabbing the attention of entrepreneurs more than ever. This is because, in the Union Budget 2025, Finance Minister Nirmala Sitharaman announced an enhanced Credit Guarantee Scheme for Micro, Small, and Medium Enterprises (MSMEs).
Now, the Guarantee Cover for MSMEs under the scheme has been increased from Rs. 5 crore to Rs. 10 crore. The Credit Guarantee Scheme aims to improve access to credit for businesses registered as MSMEs across India.
What is MSME Credit Guarantee Scheme?
MSME Credit Guarantee Scheme was launched by the Ministry of MSME, Government of India. It is a government initiative that helps the MSMEs to secure term loans from banks for machinery and equipment without the requirement of any collateral or third-party guarantee.
The Credit Guarantee Scheme for MSMEs facilitates easier access to credit for enterprises with limited assets to pledge as security. By taking advantage of this scheme, the un-served and under-served MSME segment of the MSME sector can enhance their business.
Pre-requisites for Credit Guarantee Scheme
Here are some key pre-requisites for credit guarantee scheme for Micro, Small and Medium-sized Enterprises:
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The MSME must have a valid Udyam Registration number.
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It must not be a defaulter with any Bank/NBFC.
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The enterprise must have a valid Udyog Aadhaar Memorandum and GST registration.
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The business must be actively conducting operations.
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MSMEs engaged in and service-related activities requiring term loans to buy equipment and machinery are eligible for the credit guarantee scheme.
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The MSME Credit Guarantee Scheme excludes entities involved in agriculture, Self-Help groups (SHGs) and Joint Liability Groups (JLGs). Thus, such entities shall not be eligible for the scheme’s benefits.
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For certain loan amounts, the borrowers must obtain IT-PAN before securing credit from an eligible lending institution.
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Moreover, according to Section 139A(5) read with Section 272(C) of the Income Tax Act, an IT-PAN must be mentioned on all tax-related documents such as income tax returns, appeals and challans.
Features of MSME Credit Guarantee Scheme 2025
The MSME Credit Guarantee Scheme 2025 by the Government of India includes the following features:
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Under the Credit Guarantee Scheme for MSMEs, loans of up to Rs. 100 crore for purchasing plant and machinery are eligible for 60% guarantee coverage.
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The banks and lending institutions will receive a 60% guarantee for MSME loans up to Rs. 100 crore. This will ensure reduced risks and improve the funding availability.
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The MSME Credit Guarantee Scheme provides a repayment period of up to 8 years, along with a 2-year moratorium for loans amounting up to Rs. 50 crore.
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Over the next four years, the government aims to facilitate Rs. 7 lakh crore in cumulative guarantees. This will further enhance the credit access for MSME enterprises.
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The Union Budget 2025 introduced an enhanced Credit Guarantee Scheme. It has doubled the guarantee for micro and small enterprises from the previous Rs. 5 crore to Rs. 10 crore at present.
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The scheme also offers term loan cover of up to Rs. 20 crore for well-managed exporter MSMEs.
How to Apply for MSME Credit Guarantee Scheme?
While the process to apply for MSME Credit Guarantee Scheme may vary from one financial institution to another, here is the general process:
Step 1: Approach a Participating Lender
You may identify whether the bank/NBFC/Financial Institution of your choice is a participant under the Credit Guarantee Scheme. For this, you may call them or visit their nearest branch.
We recommend you to check multiple lenders, so that you can compare the loan terms and interest rates before you can decide which lender would be most suitable for you.
Step 2: File MSME Loan Application
You must file a loan application for your MSME with all the necessary details. Along with the application, you will need to submit relevant documents.
This includes KYC documents, project reports, business plans and financial statements along with other documents requested by the lender.
Step 3: Application Evaluation by Lender
Once the application has been filed with the lender, they will evaluate it. They will carefully assess the viability of the business and decide on the loan amount accordingly.
Step 4: Credit Guarantee Scheme Application (By Lender)
In this step, the lender will apply for guarantee cover under the Credit Guarantee Scheme for MSMEs after loan approval. Typically, the MSME does not need to interact directly with the officials involved in the Credit Guarantee Scheme process.
Step 5: Disbursement of Loan Amount
Once the guarantee cover is approved, the lender will disburse the loan amount to the MSME business.
Conclusion
The Credit Guarantee Scheme is a revolutionary initiative for businesses in the MSME industry. It provides collateral-free loans and allows the micro and small businesses to grow, innovate and contribute to India’s Gross Domestic Product (GDP). If you own and manage an MSME business with a valid MSME registration and Udyam number, you can take advantage of the Credit Guarantee Scheme and take your business to the next level. Before applying for the scheme with a lender, make sure you have a strong business plan and all the required documentation to increase your chances of securing the loan.
If you want to start an MSME business, it is mandatory that you secure MSME Registration. For assistance, connect with Registrationwala.
FAQs about MSME Credit Guarantee Scheme
Q1. Is Udyam Registration required for MSME Credit Guarantee Scheme?
A. Yes, a valid Udyam Registration Number is required for the MSME Credit Guarantee Scheme. The URN verifies that a business belongs to the MSME sector.
Q2. Do I need to provide a collateral guarantee for securing a loan under Credit Guarantee Scheme?
A. No, you generally do not need a collateral guarantee when securing a loan under the Credit Guarantee Scheme in India.
Q3. Which Ministry runs the MSME Credit Guarantee Scheme?
A. The Ministry of Micro, Small and Medium Enterprises runs the Credit Guarantee Scheme for micro and small enterprises.
Q4. What is the term loan amount for well-run export-oriented MSMEs under Credit Guarantee Scheme?
A. The term loan amount for well-run export-oriented MSMEs under Credit Guarantee Scheme is up to Rs. 20 crore.
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