How to avail MSME Loans under Collateral Free Schemes of Government of India?

MSME’s that is Micro Small and Medium Enterprises is the apex body constituted for making rules, regulations for such enterprises which carry certain criteria’s to fall under the purview of MSME. In the current scenario, the Government of India is encouraging and giving the push to the MSME’s by introducing funding schemes in order to increase their efficiency by expanding their existing businesses or to set up new businesses.

How to become the MSME?

• For becoming Micro Enterprise, Investment in Plant & Machinery should be not more than Rs 1 Cr and Turnover should not exceed Rs 5 Cr.
• For becoming Small Enterprise, Investment in Plant & Machinery should be not more than Rs 10 Cr and Turnover should not exceed Rs 50 Cr.
• For becoming Medium Enterprise, Investment in Plant & Machinery should be not more than Rs 50 Cr and Turnover should not exceed Rs 250 Cr.

What is Collateral Free Scheme offered to MSME’s?

• The Ministry of Micro, Small and Medium Enterprises and Small Industries Development Bank of India (SIDBI) have set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) in order to facilitate credit guarantee scheme for MSME’s.
• The 100% Collateral Free Scheme also called the Emergency Credit Line Guarantee Scheme is provided by The National Credit Guarantee Trustee Company to banks and financial institutions.
• The Finance Minister Nirmala Sitharaman during Covid-19 pandemic has announced on May 13 some collateral free loans up to Rs 3 lacs crore supported by government guarantee in order to help the businesses from liquidity problems, bankruptcy etc.

Who can avail the benefits of the Collateral Free Schemes?

• Businesses that are registered under MSME having Udyam Registration with turnover up to Rs 250 Crore and Investment in Plant & Machinery up to Rs 50 Crore can apply for the loan under such scheme.
• The credit facilities that will be extended shall comprise both term loans and working capital without any collateral or third party guarantee to new, existing, small and micro enterprises.

What is the need to avail the finance under such scheme?

Such loan shall be used:

• For purchasing new machine and equipment’s
• Setting up a Factory or Building
• For meeting Working Capital Requirements
• For improving the existing business by either expanding or adding a product line/segment

Why do MSME’s need Udyam Registration for Collateral Free Funding?

• Registration of the MSME is called by the name of Udyam Registration which is a government registration provided with a recognition certificate and a unique number
• Those organisations which are into manufacturing, producing, processing, preserving goods or rendering services are required to get registered under Udyam but the set eligibilities of MSME are required to be met out.
• The process of registration is quite simple starting from entering personal information, verifying PAN, providing the postal address of the entity, giving bank details, enterprises details and finally submitting after accepting the declaration.

How much finance can be availed to the MSME under the collateral free scheme?

• The Collateral Free Credit Facility extended by the financial institutions to New, Existing Micro and Small Enterprises is upto Rs 200 lacs per borrowing unit.
• The cover provided under term loan  is 75% of the cost of project upto Rs 50 lacs (85% for loans upto Rs 5 lacs given to micro enterprises,80% for MSE’s owned and managed by women) with a guarantee of 50% of the credit exposure above Rs 50 lacs upto Rs 100 lacs.
• In case of working capital-depends on whether the MSME meets the eligibility requirements

What are the documents to be submitted to the Bank or Financial Institution to avail the benefits of the collateral free scheme?

• Complete KYC of the enterprise that is GST Certificate, PAN, Udyam Certificate, Licences, PAN/Aadhar Card, passports of the promoters, proprietors, partners etc.
• Project Report or Technical Feasibility Report
• CMA Data, Financial Projections
• Audited Financial Statements with ITR’s for last 2 years of the enterprise along with the bank statements for last 6 mons
• Memorandum of Association, Articles of Association in case the enterprise is a company
• ITR’s of the promoters/proprietors/partners etc.
• Business Details like details about suppliers, customers, company profile, inventory profile, working capital requirements, work in progress etc.

Conclusion

Loan taken under such scheme for purchase of assets is long term. Rate of interest ranges from 7.5% and onwards which depends on the credit ratings and the profile of the entity. The most fascinating point is that the credit will be covered completely by the CGTMSE. The moratorium offered will be of 6 months for repayment. Under MSME Loans, Subvention is of 2% on interest. Guarantee Charges shall be paid to the CGTMSE on the basis of loan sanctioned. Under the Scheme, Capital Subsidy is also available but only for prescribed machineries. It does not matter whether the enterprise runs business through owned or rented premises. It is mandatory to avail insurance of the assets purchased through the bank loan. The Primary Security of the Asset purchased through the Bank Loan shall be mortgaged/pledged/hypothecated with the lender.

The government has made easy for the MSME’s to just fulfil some conditions and apply for collateral free loans to expand their business or start a new business etc. as mentioned above which ultimately adds to the Indian Economy.