Sitharaman launches Mutual Credit Guarantee Scheme for MSMEs

Union Finance Minister Nirmala Sitharaman launched the Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSMEs) for facilitating loans up to Rs 100 crore to MSMEs for purchase of machinery or equipment without collateral.

Purpose of the Scheme: To provide guarantee coverage for term loan assistance of up to Rs 100 crore to eligible Micro, Small and Medium Enterprises (MSMEs) for their projects involving purchase of equipment/machinery. The scheme would be available for a period of four years or till cumulative guarantees of Rs 7 lakh crore are issued, whichever is earlier.

Guarantee cover: Guarantee cover means the maximum cover available per eligible borrower of the amount in default in respect of the credit facility extended by the lending institution. For this scheme, the guarantee cover would be 60 per cent of the amount in default and shall commence from the date of payment of guarantee fee or date of first disbursement of loan under the scheme, whichever is later.

Role of NCGTC: National Credit Guarantee Trustee Company Limited (NCGTC), a wholly owned company of Department of Financial Services, shall also be responsible for the operations of the scheme. NCGTC was set up on March 28, 2014 by the government of India under the Companies Act, 1956 to act as the trustee to operate various credit guarantee funds/trusts set up/to be set up by the government of India from time to time.

Eligibility for credit guarantee: 

i) It should be an MSME with a valid Udyam Registration Number (URN).

ii) It should not be an NPA with any lender.

iii) Minimum cost of equipment/machinery is 75 per cent of project cost.

Other key points:

• Loan amount guaranteed shall not exceed Rs 100 crore.

• Project cost could be of higher amounts also.

• Loan up to Rs 50 crore shall have repayment period of up to eight years with up to two years moratorium period on principal instalments. 

• For loans above Rs 50 crore, higher repayment schedule and moratorium period on principal instalments can be considered.

• Upfront (initial) contribution of 5 per cent of the loan amount shall be deposited at the time of application of guarantee cover

Significance of this scheme

• Global supply chains are realigning. India is emerging as an alternative supply source given its raw materials, low labour costs, growing manufacturing knowhow, and entrepreneurial ability. 

• One of the major costs involved in manufacturing is the fixed cost of plant and machinery/equipment. 

• With availability of credit to expand the installed capacity of manufacturing units, it can be expected that the manufacturing will grow at a faster pace. 

• Also, the need for a credit guarantee scheme for the manufacturing units, particularly for the enterprises in the medium category has been raised by industry associations from time to time. 

• So, to give a boost to manufacturing by facilitating the availability of credit for purchase of equipment MCGS-MSME is introduced. 

• The scheme will facilitate collateral free loans by banks and financial institutions to MSMEs who are in need of debt capital for their expansion and growth.

• Manufacturing sector currently comprises 17 per cent of the nation’s GDP and over 27.3 million workers. 

• Prime Minister Narendra Modi has given a call for ‘Make in India, Make for the World’ and  signalled that India is ready and keen to increase the share of manufacturing to 25 per cent of GDP. 

• MCGS-MSME is expected to give a major boost to manufacturing and thereby to ‘Make in India’.

(The author is a trainer for Civil Services aspirants.)