Small business loans: government schemes, eligibility criteria and interest rate

Today, there are a lot of schemes designed to help India’s MSME sector prosper. Here’s a list.

Small business loans government schemes, eligibility criteria and interest rate

In her recently released autobiography Indomitable, ex-banker Arundhati Bhattacharya recounts a childhood incident that underlines an area where India has made great progress over the past 50 years: making loans more accessible for small businesses.

Sometime in the 1960s, recalls the former State Bank of India (SBI) chairperson, her engineer father lost his job at Bhilai Steel Plant when the management decided to cut costs. This, she says, left her family facing grave uncertainties.

“People who remember the India of those days would understand the acute lack of opportunities for employment or the near impossibility of becoming an entrepreneur if one didn’t come from a moneyed family,” she writes.

What she did not write, and what we shall discuss here, is that if Bhattacharya’s father were to be handed the pink slip now, he would have access to a slew of business loans available in today’s new business environment. Let us explore further.

Also Read: 7 Government Subsidies Offered To Small Businesses (MSME)

Government loans for small businesses

The opening up of the economy in 1991 led to the demise of India’s infamous ‘Licence Raj’, resulting in a sharp rise in entrepreneurship in the country as shackles in the form of government licences to start businesses vanished.

This also led to a swelling in the ranks of small businesses - micro, small, and medium enterprises (MSMEs). Today, this sector boasts of some 40 million units, contributes about 40% of India’s GDP (and 40% of its exports), and generates some 11 crore jobs.

Mindful of this contribution, the government has also introduced various loan schemes for the MSME sector, as listed below:

1. PSB Loans in 59 Minutes

In November 2018, Prime Minister Narendra Modi inaugurated a digital platform called PSB Loans in 59 Minutes that approves loan applications in less than an hour (hence the name). Loans are disbursed by private and public sector banks as well as NBFCs, and the sanctioned amount ranges from Rs 1 lakh to Rs 5 crore, at an interest rate of 8.5%.

Processing takes about a week to 10 days as the lender verifies the following details:

  • GST filings
  • Income tax records
  • Bank account statements for the last six months
  • Ownership documents
  • KYC details

2. MUDRA Loans

The next category of loans for small businesses is the MUDRA loan segment, which derives its name from the agency that governs it - Micro-Units Development and Refinance Agency. As is evident from the name, the agency was set up to finance micro-businesses. 

Loans under the MUDRA scheme are released by all categories of banks (PSU, private, commercial, rural etc.) and fall under three subheads:

  • Shishu loans (Up to Rs 50,000, at an interest rate of 1%-12%)
  • Kishor loans (Rs 50,000 to Rs 5 lakh, at 8.6%-11.15%)
  • Tarun loans (Rs 5 lakh to Rs 10 lakh, at 11.5%)

Repayment periods range from 12 months to five years, with concessional rates offered for women. Individuals, MSMEs, and sole proprietorships from both rural and urban areas can apply; even fruit/vegetable sellers, small shopkeepers, and artisans are eligible.

Also Read: 10 Bank Loan Schemes For Women Entrepreneurs

3. Stand-Up India

Loans under this scheme are governed by the Small Industries Development Bank of India (SIDBI), and were designed to specifically provide loans for businesses run by Scheduled Castes, Scheduled Tribes, and women.

Branches of all banks are mandated to provide loans under this scheme to at least one entrepreneur from any of these groups. If the business has multiple promoters, the majority ownership has to rest with someone from one of the beneficiary groups.

The loan amount, ranging from Rs 10 lakh to Rs 1 crore, is expected to cover about 75% of the total project cost. Loan applicants must be engaged in trading, manufacturing or the service sector.

4. CGTMSE Loan Scheme

CGTMSE stands for Credit Guarantee Fund Trust for Micro and Small Enterprises. Under this scheme, loans are given to first-generation entrepreneurs in the MSME sector without the requirement of collateral/third-party guarantees. Both new and existing enterprises can avail of these loans as working capital up to Rs 2 crore, with preference being given to eligible women entrepreneurs.

The CGTMSE scheme offers the following benefits:

  • Guarantee cover up to 75% of the credit facility up to Rs 1.5 crore;
  • 85% of credit facility for loans up to Rs 5 lakh for micro-enterprises;
  • 80% of credit facility to MSMEs owned by women or located in the North Eastern Region, including Sikkim;
  • Guarantee cover up to 50% of the amount in default, subject to a maximum of Rs 50 lakh for MSME retail trade.

Businesses engaged in manufacturing, retail trade, educational institutions, self-help groups and training institutions, and the service sector are eligible for funding under this scheme. Any bank branch can get itself empanelled under the scheme to extend loans under the CGTMSE scheme.

5. NSIC Subsidy Scheme

The National Small Industries Corporation (NSIC) under the MSME ministry works to help MSMEs grow by providing financial benefits through two measures: marketing assistance and raw material assistance. Small businesses are given access to tenders without needing to bear any costs and are also exempted from making any security deposits for availing financial aid under this scheme.

This apart, the scheme offers financial help for units with the project costs not exceeding Rs 25 lakh for land and building. Interest rates range from 7.5% to 9%, depending on whether the company is a micro, small, or medium enterprise.

Also Read: Facebook's Small Business Loans Initiative: All You Need To Know

6. Make in India Soft Loan Fund for MSMEs (SMILE)

The SIDBI-governed SMILE scheme extends soft loans (quasi-equity financing) to new MSMEs to help them meet their required debt-equity ratio. The loan amount ranges from Rs 10 lakh for equipment finance to Rs 25 lakh, with a maximum repayment period of 10 years that includes a moratorium of up to 36 months. 

Interest is charged as per the borrower’s profile and requirements. Security is in the form of first charge over all assets (that is, the creditor has the first rights on the property), as well as the promoter’s personal guarantee.

7. Udyogini Scheme

This is aimed at women entrepreneurs in the age group of 18-55 to meet their capital requirements. The scheme allows a maximum loan of Rs 15 lakh and does not involve a processing fee or collateral. However, the annual income of the applicant’s family must not exceed Rs 1.5 lakh. There is no income limit for physically challenged women or widows.

To avail of the loan, applicants have to provide passport-sized photographs, birth certificate, BPL card and Aadhaar card, caste certificate, bank passbook, ration card, and certification of income. Altogether, 88 categories of businesses are covered under the scheme.

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