The government is prepared to introduce a collateral-free term loan scheme aimed at enhancing the manufacturing capacity of micro, small, and medium enterprises (MSMEs), Finance Minister Nirmala Sitharaman announced on Saturday. She mentioned that the scheme will soon be presented to the Cabinet. Speaking at the National MSME Cluster Outreach Programme in Bengaluru, Sitharaman explained that a new credit guarantee scheme, which will support term loans for MSMEs, is expected to go before the Cabinet "sooner."
Following the success of the Emergency Credit Line Guarantee Scheme (ECLGS)—which provided crucial liquidity to millions of MSMEs during the COVID-19 pandemic—the government plans to launch a term-loan facility for MSMEs to help them acquire modern equipment and machinery. By December 2023, the ECLGS had issued guarantees for over 1.19 crore borrowers totaling ₹3.68 lakh crore.
Despite the ease of accessing working capital loans, MSMEs have struggled to secure term loans, Sitharaman noted. The proposed scheme will offer collateral-free guarantees for term loans up to ₹100 crore, though businesses may borrow more if needed. "You don’t even need a third-party guarantee, no collateral, no third-party guarantee,” she emphasized.
This scheme is part of five key budget initiatives to support MSME growth. “This budget provides special attention to MSMEs and manufacturing, particularly labour-intensive manufacturing. We have formulated a package covering financing, regulatory changes, and technology support for MSMEs to help them grow and also compete globally," she stated in her Budget speech on July 23.
The budget speech outlined a credit guarantee scheme for MSMEs in the manufacturing sector, designed to pool credit risks and operate through a self-financing guarantee fund, offering cover up to ₹100 crore per applicant. Borrowers will need to pay an upfront and annual guarantee fee.
The government has recently doubled the maximum collateral-free loan limit to ₹20 lakh for MSMEs under the Mudra loans program, creating a new ‘Tarun Plus’ category for entrepreneurs who have previously repaid loans. Other budget proposals for MSMEs are underway, including a new credit assessment model, expanded Small Industries Development Bank of India (SIDBI) branches in MSME clusters, and mandatory onboarding on the Trade Receivables Electronic Discounting System (TReDS) platform.
