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Mutual Credit Guarantee Scheme for MSMEs

Posted 24 Mar 2025

Updated 27 Mar 2025

5 min read

Why in the News? 

Government approved Mutual Credit Guarantee Scheme to Strengthen MSME Manufacturing Sector, fulfilling the budget announcement of 2024-25.

Key Features of Mutual Credit Guarantee scheme for MSMEs 

  • Guarantee Coverage: Offers 60% guarantee coverage by National Credit Guarantee Trustee Company Limited (NCGTC) (a wholly owned company of Department of Financial Services) to MLIs for loans sanctioned under MCGS-MSME.
    • Member Lending Institutions (MLIs) are Financial Institutions such as Commercial Banks, NBFCs registered with NCGTC under the Scheme.
  • Eligible Borrower: MSME with valid Udyam Registration; Not a Non-Performing Asset with any lender; Minimum 75% of project cost for equipment/machinery.
  • Duration of the Scheme: Available for 4 years or until Rs 7 lakh crore in guarantees are issued, whichever is earlier. 
  • Repayment Terms: 
    • Loans up to ₹50 crore: Repayment period of up to 8 years, with a moratorium of up to 2 years on principal installments. 
    • Loans above ₹50 crore: Longer repayment schedules & moratorium periods can be considered. 

Other Key Measures Announced for MSMEs in Union Budget 2025-26

The Below image shows the revised classification of MSMEs.
  • Revised the classification for MSMEs:  The new thresholds set at 2.5 times the current investment and twice the turnover limits (refer infographic). 
  • Enhanced Credit Availability: The credit guarantee cover will be enhanced -
    • For Micro and Small Enterprises, from 5 crore to 10 crore, leading to additional credit of 1.5 lakh crore in the next 5 years.
    • For Startups, from 10 crore to 20 crore, with the guarantee fee being moderated to 1 per cent for loans in 27 focus sectors important for Atmanirbhar Bharat.
    • For well-run exporter MSMEs, for term loans up to 20 crores.
  • Customised Credit Card Scheme: It will provide ₹5 lakh in credit to micro enterprises registered on Udyam portal, with 10 lakh cards set to be issued in first year. 
  • A new Fund of Funds with ₹10,000 crore will be established to expand support for startups.
  • A scheme for 5 lakh first-time women, Scheduled Caste, and Scheduled Tribe entrepreneurs will provide term loans up to ₹2 crore over five years.

Significance of MSMEs for India

  • Contribution to GDP: MSMEs contributes approximately 30 % of the country's GDP, 36 % to the country's manufacturing output
  • Employment: India has over 1 crore registered MSMEs, employing nearly 7.5 crore people
  • Foreign Currency: MSMEs contribute ~45% of India's total exports. 
  • Reduces Disguised Unemployment: Absorbing the surplus agricultural labour, they help to reduce the problem of disguised unemployment in rural areas.
    • Disguised unemployment is a situation where more people are employed than are required for a job or role. It's also known as hidden unemployment or labor hoarding.
  • Rural Development: Around 50% of the total MSMEs operate in rural areas and provide 45 % of total employment.

Challenges Faced by MSMEs

  • Finance issuesInformal nature of MSMEs, credit assessment difficulties due to information gaps, absence of collateral etc. make it difficult for MSMEs to secure loans.
  • Infrastructure Bottlenecks: Poor roads, unreliable power supply, and inadequate digital infrastructure hinder business operations.
  • Delayed Payments: A large number of MSMEs are cater to the needs of large industries, both in public and private sector. But they face delayed payments, impacting cash flow and working capital.
  • Regulatory & Compliance Burden: Complex taxation, labor laws, and frequent policy changes increase operational difficulties.
  • Limited Integration of TechnologyAffects productivity and competitiveness.
  • Export issues: Inadequate infrastructure, Lack of Environmental, social and governance (ESG) reports by Indian MSMEs impacts exports competitiveness.

Initiatives Undertaken for MSMEs

  • Trade Enablement & Marketing (TEAM) Initiative: To enable and assist micro and small enterprises to onboard e-commerce platforms by assisting in catalogue preparation, account management, logistics and packaging.
  • PM VISHWAKARMA: Provide end-to-end support to artisans and craftspeople of 18 trades who work with their hands and tools.
  • Self-Reliant India Fund Scheme: Launched by Ministry of MSME, provides equity funding to those MSMEs which have the potential and viability to grow and become large units. 
  • Public Procurement Policy: It mandates 25% of annual procurement by Central Ministries from Micro and Small Enterprises.
  • RAMP Scheme: It is a World Bank supported Central Sector Scheme aimed at improving access of MSMEs to market, finance and technology upgradation.  
  • Udyam Assist Platform (2023): Launched to bring the Informal Micro Enterprises under the formal ambit for availing the benefit under Priority Sector Lending.
  • National Institute for Micro, Small and Medium Enterprises (Ni-MSME): For enterprise promotion and entrepreneurship development. 

 

Way Forward

  • Policy Support: Consistent and supportive government policies that address the specific needs of MSMEs, including tax incentives and infrastructure development.
    • Assist MSMEs embrace best business practices in line with the fast-changing business environment.
  • Addressing Credit Gaps: Assess credit worthiness of MSMEs by utilising unexplored data sources like digital transaction trails & data generated through e-commerce sites to expedite lending.
  • Technological Adoption and Digitalization: Providing training and resources for digital literacy, promoting e-commerce platforms, and encouraging the adoption of Industry 4.0 technologies.
  • Market Access and Expansion: Facilitating participation in trade fairs and exhibitions, promoting exports, and creating platforms for B2B networking.
  • Simplification of Regulatory Framework: Reducing bureaucratic hurdles, streamlining compliance procedures, and creating a business-friendly environment.
  • Integration with Global Value Chains (GVC): Being part of GVC would enable MSMEs to produce quality goods and services which will have greater acceptability in the global market. 
  • Promoting the formation of MSME clusters: To enhance collaboration, resource sharing, and collective bargaining power.
  • Tags :
  • MSMEs
  • Mutual Credit Guarantee scheme
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