What are MSME loans?
Micro, small and medium enterprise (MSME) loans are unsecured loans offered by several financial institutions to help entrepreneurs meet various business-related expenses. As per the Indian government and RBI, these loans are for certain business enterprises that fall under these categories:
Company (manufacturing or service provider) |
Micro |
Small |
Medium |
Investment threshold |
Less than Rs. 1 crore |
Less than Rs. 10 crore |
Less than Rs. 20 crore |
Turnover threshold |
Less than Rs. 5 crore |
Less than Rs. 50 crore |
Less than Rs. 100 crore |
Aside from an MSME loan, financial institutions also offer these loans under several government schemes like:
- Credit guarantee fund trust for micro and small enterprises (CGTMSE).
- Prime Minister’s employment generation programme (PMEGP).
- Micro unit development and refinance agency (MUDRA Loan).
New definition of MSME
The Government of India introduced a revised definition of MSME on May 13, 2020. Here are the key points of the new definition:
- Change in criteria: The classification of MSMEs now considers both investment and annual turnover, whereas previously only investment was considered.
- Increased investment limit: The investment limit for MSME classification has been raised, allowing more firms and enterprises to qualify for MSME benefits.
- Uniform criteria: The criteria for classifying MSMEs are now uniform for both Manufacturing and Services Enterprises. The details are provided in the table below:
- MSME Loans: Micro, Small, and Medium Enterprises can access MSME loans for business expansion or setting up new enterprises. The interest rates for MSME loans start at 7.65% p.a., and the loan amount sanctioned can range from as low as Rs.50,000 to several crores. The repayment tenure can extend up to 15 years, depending on the sanctioned loan amount.
These changes aim to provide greater support and opportunities for MSMEs to grow and thrive in the Indian business landscape.
The purpose of MSME loans is to provide financial assistance to Micro, Small, and Medium Enterprises (MSMEs) in order to safeguard their stability and future growth. These loans can be utilized for various reasons, depending on the specific needs of the entity. Some common purposes for MSME loans include:
- Expansion or Diversification: Funding the expansion or diversification of existing business operations to reach new markets or increase production capacity.
- Establishing or Starting a New Business: Providing capital to establish a new business venture or start a new unit within an existing enterprise.
- Debt Consolidation: Paying off existing debts to improve financial health and reduce financial burden.
- Purchase of Assets: Financing the purchase of new plant and machinery, equipment, or other assets required for business operations.
- Working Capital: Meeting short-term working capital requirements to ensure smooth day-to-day functioning of the business, including covering operational expenses, purchasing inventory, or managing cash flow.
Overall, MSME loans serve as a vital resource for MSMEs to address their financial needs and support their growth and sustainability in the competitive business environment.
Types of MSME Loans
NBFCs and banks offer a variety of loan products tailored to the needs of Micro, Small, and Medium Enterprises (MSMEs) engaged in manufacturing, trading, or service operations. These loan products vary based on factors such as the organization's requirements, loan tenure, interest rates, collateral requirements, and urgency of funds. Some common types of MSME loans include:
- Term Loans: These are traditional loans with a fixed repayment schedule and are typically used for long-term investment needs such as purchasing machinery or expanding facilities.
- Line of Credit/ Overdraft Facility: Provides MSMEs with access to a pre-approved credit limit that they can draw upon as needed. Interest is charged only on the amount utilized.
- Bill Discounting or Invoice Discounting: MSMEs can receive funds by selling their accounts receivable (invoices) to a financial institution at a discount.
- Point of Sale Finance: Offers financing based on the MSME's future credit or debit card sales, often used by retail businesses.
- Bank Guarantee: A guarantee provided by a bank on behalf of the MSME to ensure payment to the beneficiary in case of default or non-performance of contractual obligations.
- Pradhan Mantri Mudra Yojana: A government scheme aimed at providing loans up to Rs. 10 lakhs to non-corporate, non-farm small/micro-enterprises.
- Asset-Backed Loans: Loans secured by collateral such as property, equipment, or inventory.
- Business Loans specifically targeting Women Entrepreneurs: Specialized loan products designed to support women-owned MSMEs, often offering preferential terms or lower interest rates.
These loan products cater to the diverse financing needs of MSMEs and play a crucial role in supporting their growth and development.
MSME loans come with specific eligibility criteria, and business owners must meet all terms mentioned to avail of the benefits. Bajaj Finance offers MSME loans of up to Rs. 80 lakh to help enterprises meet their immediate funding requirements. It comes with minimum eligibility and documentation requirements to simplify loan processing. This loan is available at affordable interest rates and can be repaid over a flexible tenure. With Bajaj Finance, businesses can opt to part-prepay or foreclose the loan account before the tenure ends at nominal charges.
Frequently asked questions
MSME means micro, small, and medium enterprises. They are businesses that have a certain limit of investment and turnover, depending on the sector they belong to.
Micro, small, and medium enterprises (MSMEs) encompass businesses such as local shops, small manufacturing units, family-owned businesses, and service-oriented ventures like restaurants, salons, and consultancy firms.
Micro, Small, and Medium Enterprises (MSMEs) in India are the backbone of the economy, contributing significantly to employment generation and industrial growth. To support the growth and development of these enterprises, various financial institutions offer MSME loans tailored to their specific needs. Eligibility for MSME loans typically depends on several factors, including:
- Business Classification: Entities classified as Micro, Small, or Medium Enterprises under the MSMED Act, 2006 are eligible for MSME loans.
- Turnover Criteria: Businesses with a certain turnover limit, as defined by the government, are eligible. For example, micro-enterprises have a lower turnover limit compared to small and medium enterprises.
- Registration: MSME registration with the government is often required to avail MSME loans, although it may not be mandatory for all lenders.
- Credit History: A positive credit history and financial track record of the business, including timely repayment of previous loans, may enhance eligibility.
- Nature of Business: Businesses engaged in manufacturing, trading, or services sectors are eligible, provided they meet the criteria set by the lending institution.
- Collateral: Depending on the loan amount and lender's policies, collateral or security may be required. However, various MSME loan schemes, especially those backed by government initiatives, offer collateral-free loans to eligible businesses.
- Compliance: Compliance with regulatory requirements such as GST, income tax, and others is essential for loan eligibility.
- Business Plan: A well-defined business plan outlining the purpose of the loan and its potential for generating revenue and growth may improve eligibility and increase the chances of loan approval.
- Creditworthiness: The business's ability to repay the loan, demonstrated through factors such as cash flow projections, profitability, and sustainability, is crucial for loan approval.
- Overall, MSME loans aim to support the growth and development of micro, small, and medium enterprises by providing them with timely and affordable financial assistance.
As an expert in India's Micro, Small, and Medium Enterprises (MSME) sector, I can affirm that the government has implemented various initiatives to support the growth and development of MSMEs, including subsidies for MSME loans.
- Yes, there are subsidies available for MSME loans in India.
- he Credit Linked Capital Subsidy Scheme (CLCSS) is a notable initiative providing subsidies for technology upgradation.
- Under CLCSS, eligible MSMEs can receive a subsidy of up to 15% of the project cost for purchasing machinery and equipment.
- The subsidy amount is subject to a maximum limit, which varies based on the category of the MSME.
- Various state governments and financial institutions also offer subsidies and incentives to MSMEs to promote entrepreneurship and expansion.
- These subsidies aim to ease the financial burden on MSMEs and enhance their competitiveness in the market.
- MSMEs are encouraged to explore and take advantage of such subsidy schemes to fuel their growth and productivity.
Generally, MSME loans can range from as low as ₹10,000 to as high as ₹5 crore or even more, depending on factors such as the business's financial health, creditworthiness, repayment capacity, and the specific loan product being offered.
