MSME Loan

Last Updated 26th May 2020

MSME Loan Scheme

MSME loans are business loans offered to the MSMEs or Micro, Small and Medium enterprises or to the SMEs or Small and Medium Enterprises in the form of SME loans.

Interest Rate 13.50% onwards
Popular MSME loan schemes Mudra Loan
Credit Guarantee Funds Trust for Micro and Small Enterprise or CGTMSE
Prime Minister’s Employment Generation Programme or PMEGP
Popular SME loan products Working Capital Loan
Term Loan

Highlights of Atmanirbhar Package (Rs. 20 Lakh Crore) for COVID 19 as announced on 13th May 2020 msme

Apply for Business Loan @ 13.50%* Get upto ₹ 1,000* Cashback
+91

What is MSME Loan?

MSME loans are business loans offered to the MSMEs or Micro, Small and Medium enterprises or to the SMEs or Small and Medium Enterprises in the form of SME loans. These loans are offered for the advancement of business and other activities like purchase of machinery and raw material, to meet the working capital requirements, and to invest in fixed assets. Banks and financing institutions like NBFCs offer MSME Business loans. However, the interest rates and loan amount vary across the banks and NBFCs. These loans are usually offered to small business owners, women entrepreneurs, and startups. Eligible enterprises for this scheme are Sole Proprietorships, Partnership Firms, Manufacturing or service-based micro and small enterprises excluding Retail traders, educational institutions, training institutions, agriculture & Self Help Groups. 

MSME Definition

MSME stands for Micro, Small and Medium Enterprises. MSMEs are classified into 2 categories; one is manufacturing enterprise engaged in manufacturing or production of goods and second is service enterprise engaged in providing services. These categories were earlier defined in term of investment in plant and machinery or equipment. As per the Atmanirbhar Covid 19 relief package announcement, the classification of MSMEs has been changed from investment to investment and annual turnover.

Classification Micro Small Medium
Manufacturing Investment < Rs 25 lacs Investment < Rs 5 crore Investment < Rs 10 crore
Services Investment < Rs 10 lacs Investment < Rs 2 crore Investment < Rs 5 crore

New MSME Definition as announced on 13th May 2020

  • MSME Classification Criteria has been changed from Investment to Investment and Annual Turnover.
  • The Investment limits for classification for MSMEs have been increased which means more enterprises are now eligible for MSME schemes.
  • Classification Criteria is now uniform for Manufacturing and Services Enterprises.

Relief Package for MSMEs

COVID19 Relief and Atmanirbhar package for MSMEs announced on 13th May 2020

  • Banks and NBFCs to provide Emergency Credit Line to MSMES to up to 20% of entire outstanding credit as on 29.2.2020
    • Eligible Borrowers: Up to Rs 25 crore of outstanding loan and up to Rs 100 crore of turnover
    • Loan Tenure: 4 years with 1 year moratorium
    • Guarantee: 100% credit guarantee cover by government to Banks and NBFCs.
    • Interest: Interest Capped and No Guarantee Fee
    • Validity: Scheme available till 31st Oct 2020
  • Subordinated Debt along with partial guarantee support from government to banks for providing Rs 20000 crore subordinated debt to stressed and NPA MSMEs. Government to take the risk cover up to first 20% of the loss
  • Fund of Funds with a corpus of Rs 10000 crore to be set up to provide equity funding support to MSMEs with high growth potential
  • New Definition of MSMEs announced
  • Global Tenders for any government procurement of up to Rs 200 crore disallowed which means more opportunity for domestic MSMEs
  • All MSME receivables from Gov and CPSEs to be released in the next 45 days.

Government MSME Schemes

MSME Schemes Description
Mudra Loan The Mudra loan yojana was launched to provide adequate functioning to the non-corporate MSMEs. The scheme focuses more on the priority sector lending, with  maximum lending of Rs 10 lakhs. 
Credit Guarantee Funds Trust for Micro and Small Enterprise or CGTMSE CGTMSE is an MSME scheme launched by the Government of India to provide collateral-free loans to the existing and new Micro and Small scale industries. The loans are granted for a maximum amount of Rs 1 crores. 
Prime Minister’s Employment Generation Programme or PMEGP PMEGP is an integrated subsidy scheme linked with Prime Minister Rojgar Yojana. The scheme was launched in 2008 and aims to provide business opportunities for the unemployed youth.

MSME Schemes by Banks in India

MSME Products Description
Working Capital Loan This type of loan is offered by banks to fulfil daily cash requirements. Some of the examples of Working Capital Loan are Cash Credit Loan, Bills Discounting Facility and Letter of Credit
Term Loan Term Loan is offered to MSMEs for capital expansion, capital expenditure or buying fixed assets. This can be secured and unsecured.

Features of MSME Loan

MSME loans are an effective source of funds for business owners who wish to expand or even set up their businesses on a small scale. Some of the features of MSME loans are listed as follows:

  • The MSME loans aim to facilitate credit flow in the MSME sector
  • These loans aim to bring in the upgradation of technology to the small business sector
  • MSMEs loans provide overall development to the small scale industry through skill development and training programs
  • MSME loans are offered to all borrowers who are related to small scale industries: Sole Proprietorship Firms, Partnership Firms, Private Limited Companies, Public Limited Companies. Further, Manufacturing or service-based micro and small enterprises are eligible excluding Retail traders, educational institutions, training institutions, agriculture & Self Help Groups
  • The MSME loans are offered for a maximum period of 15 years.
  • The MSME loans can be both secured and unsecured, depending on the borrower's repayment capacity and on the bank's terms and conditions. 
  • The interest rates on MSME loans vary across lenders that begin from 13.50%
  • Similar to the interest rates, the loan amount can also vary across the lender and the borrower. However, it cannot increase Rs 500 crores.

Compare MSME Loan from Top Banks

An unsecured business loan is a business loan facility that allows a borrower to borrow funds without keeping any asset or mortgage as collateral. Further, since there is no collateral involved, no time is wasted upon collateral verification and documentation. This makes unsecured business loan hassle-free due to easy processing and minimal documentation. Besides, the loan can be availed through online portals of various banks and is quickly approved between 24 hours. 

Bank Interest Rate
ICICI Bank 16.49%
HDFC Bank 15.65%
IndusInd Bank 14.00%
Bajaj Finserv 18.00%
Capital First 21.00%
IDBI Bank 12.25%
Bank of Maharashtra 14.50%
Indian Overseas Bank 14.90%
Bank of Baroda 14.10%
PNB 12.65%

Eligibility for MSME loan

In order to avail of an MSME loan, one needs to fulfill certain eligibility factors. These are listed as follows:

  • The business for which loan is availed should be set across the service or manufacturing sector.
  • The investments in the manufacturing sector should not exceed Rs. 10 crores.
  • The investments in the service sector should not exceed Rs. 5 crores.
  • The business should be in operation for more than six months, in case the fund is borrowed for business expansion.
  • The business set up should not fall under the blacklisted categories. 
  • The applicant of MSME loan should be aged above 25 years of age.

MSME Loan Schemes

Similar to Banks and NBFCs, MSME loans are also offered to the potential borrowers by the Government of India. The schemes are funded by the Ministry of Micro, Small and Medium Enterprises, in order to fulfill the financing needs of the budding businesses and thereby enhance the socio-economic conditions of the country. Some of the popular Government-funded MSME loan schemes are listed as follows: 

Mudra Loan

Mudra is Micro Units Development and Refinance Agency. The Mudra scheme or Pradhan Mantri Mudra Yojana was set by the Government of India to provide the required funds to the non-corporate MSMEs. The maximum funds that can be borrowed with Mudra Loan are Rs. 10 lakh which, however, varies as per the business development stage. The funds under Mudra loan is allocated through three schemes which are Shishu- loans up to Rs. 50,000, Kishore-loans up to Rs 5,00,000 and Tarun-loans up to Rs 10 lakhs. 

Key features of Mudra loan scheme are

  • Mudra loan provides MSME loans without collateral 
  • Processing fee waive off by most banks on the Shishu scheme
  • Mudra loan is offered with credit guarantee wherein risk sharing is applicable to a set of correlative loans instead of a single loan

Credit Guarantee Funds Trust for Micro and Small Enterprise or CGTMSE

Credit Guarantee Fund Trust for Micro and Small Enterprises or CGTMSE scheme has been launched to guarantee loans extended by commercial banks to micro and small enterprises (MSEs). Under the schemes, existing or new MSEs are eligible to get Collateral free loans up to Rs. 1 Crore backed by a guarantee provided by CGTMSE. 

Key features of CGTMSE scheme

  • Annual Guarantee Fee of 1.5% (0.75% for North Eastern Region including Sikkim).
  • Guarantee coverage is up to 75% of the credit facility up to Rs 50 lakh and is 50% for a credit facility of Rs. 50 lakh to 1 crore.
  • Credit guarantee cover can be higher at 85% for micro-enterprises up to Rs 5 lakh, women-oriented enterprises and enterprises belonging to the North East region.

Prime Minister’s Employment Generation Programme or PMEGP

Prime Minister Employment Generation Programme is an integrated subsidy scheme that is linked to Prime Minister Rojgar Yojana and the Rural Employment Generation program. The scheme was launched in order to provide employment opportunities to the young people of the country who are educated and hold the potential to be employed, and thus the scheme funds the business endeavors of the youth. The scheme offers funds through various sub-schemes, which are Credit for Micro Enterprises, Mahila Uddyami Scheme, Microcredit scheme, Mudra Card, and Equipment finance scheme, among others.

Key features of PMEGP scheme are

  • Under this scheme, the maximum project cost for the service sector should not exceed Rs 10 lakhs. However, for the manufacturing sector, the set limit is Rs 25 lakhs.
  • The scheme covers all industries even, coir based projects. 
  • Business units that are already running on Government subsidies are not eligible for this scheme.

SME Products offered by Banks in India

Banks in India offer various banking facilities and loans to meet the business requirements of SMEs with respect to credit, banking transactions, and taking counterparty transactions. Some of the popular SME products and services offered by the majority of the banks in India are listed as follows: 

Working Capital Loan

Banks offer various fund based and non-fund based working capital facilities to MSME customers to assist them in funding their daily operations. Some of the popular MSME working capital loan products are:

  • Cash Credit Loan- A SME enterprise can avail of a cash credit facility with a pre-approved limit to manage its seasonal, urgent, and unplanned working capital financing requirements. SMEs are allowed to borrow and repay within a pre-approved limit, thus allowing them to meet short term working capital loan requirements on an ongoing basis. SMEs can utilize the funds withdrawn for business purposes such as purchasing raw material, power, and fuel, buying stocks, etc. 
  • Bills Discounting Facility- If your business runs on credit and bills receivable constitute a significant proportion of your current advances or working capital, then you have the option to discount your bills receivable with banks and release liquidity. Banks typically accept bills drawn by you on your customers and pay you immediately after deducting some commission or discount. The bank presents the Bill to the borrower's customer on the due date of the Bill (End of tenure) and collects the total amount from your customers. 
  • Letter of Credit- A letter of credit is an assurance by a bank to pay one party on behalf of another party. At your request, the bank will issue a letter of credit to your seller or supplier, guaranteeing payment against the supplies or raw material sold by the vendor to you. The Letter of credit will be honored under instructions of the parties, if the supplier has complied with the condition regarding quality, quantity, price, date of dispatch, etc. Letter of Credit is mostly used in international trade. 

Term Loan

Banks also extend fund based facilities to MSMEs for capacity expansion, capital expenditure, and for buying fixed assets. Some of the popular MSME term loan products are:

  • Secured Term Loan- You can avail of the Term Loans facility for capacity expansion, capital expenditure, and for buying fixed assets. Banks may create a charge on the fixed assets that are bought by the loan amount. Banks may also require collateral security, for granting a secured term loan. Loans against the collateral of residential, commercial, or industrial property are the most popular secured term loans for SMEs.
  • Loans for purchasing construction equipment or commercial vehicles- If you are infrastructure or a construction company, you may avail of a Construction Equipment Loan to finance the purchase of construction equipment against the hypothecation of the equipment purchased. Several banks and NBFCs finance a wide range of construction equipment which are manufactured by large reputed firms such as L&T, Komatsu, Caterpillar. A few of the popular equipment that is financed by lenders include excavators, tipper/ dumpers, transit mixers, cranes (Pick N Carry, Heavy Duty, Tower & Derrick), wheel loaders, compactors, road rollers, pavers, etc.

Documents Required for MSME Loan

The borrower needs to fulfil certain documentation requirements to avail of MSME loans. These include: 

  • Identity proofs: Aadhaar card, PAN card, Voter ID card, driving license, passport, etc.
  • Address proofs: Utility bills such as electricity, water or broadband bills, Ration card, Rent agreements, etc.
  • Finance proofs: Last two years ITR documents, Profit and Loss statements, banking statements or passbook copies.
  • Business-related documents: Firm registration certificate, professional certificates in case of self-employed professionals, business turnover proofs for sole proprietors, partnership agreements for business partners, and Memorandum of Associations wherever applicable.

FAQs

Which industry comes under MSME?

MSME covers all Micro Small and Medium enterprises, which covers both the service sector and the manufacturing sector. Business set as micro industries with a capital of not more than Rs 25 lakh; small businesses that hold investment exceeding Rs. 25 lakhs but up to Rs. 5 crore and medium industries where investments range between Rs. 5 to 10 crores are covered under the MSMEs.

What is the MSME category?

The MSME category is the categorization of industries as MSME, whose annual turnover does not exceed Rs. 250 crores in the case of the manufacturing and service sector. 

Is there any turnover limit for MSME?

The turnover limit for MSME is Rs. 5 crores for micro enterprise, Rs. 5 crore to 75 crores for small enterprise, and for medium enterprise it is Rs. 75 crores to 250 crores.

  Do Banks provide MSME loan schemes?

Various banks provide MSME loans. Some of the top lenders of MSME loans are SBI, Bank of Baroda, Bajaj Finserv and Tata Capital.

Which bank is best for MSME loans?

Presently, IndusInd Bank offers lowest MSME loans at an interest starting from 13.50%.

How can I get an MSME loan?

Both banks and NBFCs offer MSME loans. You can get an MSME loan by either applying online or by visiting the lender. However, meeting eligibility and document requirements is necessary.

What is the PMEGP loan scheme?

PMEGP is Prime Minister Employment Generation Programme. It is a subsidy scheme that offers financial assistance to young people who wish to set up their business platforms. 

What is the interest rate for the MSME loan?

The interest rate for MSME loan ranges between 13.50% to 33.50%.


Business Loan News - May 2020
*Terms and conditions apply. Credit at sole discretion of lender subject to credit appraisal, eligibility check, rates, charges and terms. Information displayed is indicative and from collected from public sources. Read More