Micro Small And Medium Enterprises Loan

Definition of MSME as per MSME Development Act, 2006

An enterprise is one which manufactures or produces or processes or preserves goods or services. These enterprises can be categorized based on their investment in plant and machinery for production or manufacturing houses. The enterprises can be categorized based on their investment in equipment for servicing units.

Category of enterprises in manufacturing units

• Micro enterprises: Investment in plant and machinery does not exceed Rs. 25 lakhs
• Small enterprises: Investment in plant and machinery is more than Rs. 25 lakhs but does not exceed Rs. 5 crores
• Medium enterprises: Investment in plant and machinery is more than Rs. 5 crores but does not exceed Rs. 10 crores

Category of enterprises in servicing units

• Micro enterprises: Investment in equipment does not exceed Rs.10 lakhs
• Small enterprises: Investment in equipment is more than Rs.10 lakh but does not exceed Rs.2 crores
• Medium enterprises: Investment in equipment is more than Rs.2 crore but does not exceed Rs. 5 crores

Key features of MSME Loan

The key features of MSME loan are –

• Loan for amount not exceeding Rs. 1 crore can be availed within an hour through online portal
• An interest subvention of 2% is applicable for all GST registered MSMEs on fresh and incremental loans
• To enable entrepreneurs access credit from banks for clearing receivables and ensuring that they have revolving credit which will solve cash cycle to a large extent, the companies are required to mandatorily be on TReDS platform if they have a turnover of Rs. 500 crore and above
• PSUs compulsorily procure 25% from MSMEs instead of 20% of their total purchases
• Out of 25% which is mandated for MSMEs, 3% is reserved specially for women entrepreneurs
• Technology centres with investment of Rs. 6000 crores will be established
• For establishing pharma clusters, 70% of cost will be borne by Government of India
• Only a single window of consent is required for air and water pollution laws. Returns will be accepted through self – certification and only 10% MSME units to be inspected
• Minor violations can be rectified by simple procedures instead of approaching court

Understanding the nuances of MSME Loan

The Guarantee Trust offer guarantee to the loans extended and incase of default will ensure that the losses are compensated duly. For a loan of Rs. 5 Lakhs, 85% is offered as guarantee by the Guarantee Trust. The Credit Guarantee Fund Trust for Micro and Small Enterprises is established to offer credit facility for upto Rs. 1 crore that the lender has funded without collateral or third-party guarantee. This trust charges a nominal annual service fee from the borrower to offer the cover against loans without collateral extended specifically for the MSME sector. The fee applicable is guarantee fee of 1.5% and service fee payable annually at 0.75% on credit facilities sanctioned. The fee payable is depended on the loan amount borrowed. For a loan amount of Rs. 5 Lakh, the guarantee fee is 1% and service fee is 0.5% (payable annually).

What is Credit Guarantee Fund Trust for Micro and Small Enterprises?

First generation entrepreneurs are gaining funds from venture capitalists who see value in promoting startups. The Government and banks have woken up to the need to promote the micro, small and medium enterprises. To relieve them of this hassle, Ministry of Micro, Small & Medium Enterprises (MSME), Government of India launched Credit Guarantee Scheme (CGS). Under this scheme, the banks extended credit to first time entrepreneurs without collateral, there is guarantee against these loans provided by the trust. This scheme has enabled strengthening of credit delivery system and has facilitated smooth flow of credit to the MSE sector.

These loans are extended for a variety of businesses, both manufacturing and services are included within this universe. Any business which establishes project viability and financial viability will be eligible for loan under this scheme. The required licenses and registrations must be carried out adequately.

Documentation required for availing MSME Loan

Although the loans are either covered under the CGS and a percentage of the loan quantum can be availed as guarantee –

• Identity proof, Address proof, income proof
• Business plan explaining the market feasibility and financial viability with relevant cash flow and clarity of revenue stream
• Filled in application with photograph
• Relevant licenses from Government and registration as required

Advantages of availing MSME Loan

These are some of the advantages of availing MSME loan –

• Easy and quick sanction of bank loans – The loans applied under MSME category after registration under MSMED Act qualifies as priority sector lending. Since the guarantee is under CGS scheme by Government of India, the loans are processed and sanctioned faster.
• Lower interest rates – The lower interest rates are applicable on MSME loan. Since these are loans with collateral in the form of guarantee under the Trust, they are extended with a lower interest rate.
• Excise exemption scheme – The MSME loans qualify for excise exemptions scheme, no other loan extended by banks qualifies for excise duty exemption.
• Exemptions available under direct tax laws – There are specific exemptions applicable on MSME loan under the direct tax laws.
• Other support available under the Statute – Support such as reservation and interest on delayed payments is available from the statutory authority.

Eligibility criteria for MSME Loan

MSME loan is offered to all businesses which fall under the priority sector. The priority sector has been defined as a sector which has a telling impact on large section of the population. Also, the sectors which affect the weaker sections of the society and labor-intensive sectors are identified as priority sector. Sectors which can avail MSME loan are – Agriculture, education, export credit, micro and small enterprises etc. The sectors that fall under this category are identified and announced by the Government from time – to -time. The borrower should also register the business entity under the MSMED Act.

MSME registration

India facilitates the promotion and development of micro, small and medium enterprises under the MSMED Act. This Act extends incentives, schemes and subsidies which ensure that MSMEs grow at a desired pace to enable contribution to the economic value of the country. To avail the benefits under the MSMED Act, the companies must register under the MSME scheme. It is mandatory for all types of business entities such as proprietorship firms, partnership firms, LLPs, private limited company’s and public limited companies.

MSMEs are pertinent for the Indian economy, they are key contributors to the economic growth of the country. They promote equitable development for all. MSM enterprises are labor intensive as compared to large organizations. Their potential to create jobs is significant at a very low capital cost. They share a major percentage of total industrial produce and export in India. The Government has acknowledged this and is consistently launching schemes and benefits which provide a conducive environment for the betterment of MSME.