How to Get a Loan for MSMEs? Eligibility, Documents Required & More

MSME stands for Micro Small and Medium Enterprises, which are categorised based on their investment size. The following table provides a revised classification of MSMEs, which was declared in May 2020-

MSMEs are of huge importance to India, as 45% of the manufacturing output, and 40% of the total exports come from MSMEs. This sector has also made a significant contribution to employment generation in the country. The number of individuals employed in micro-enterprises has increased from 3.87 lakhs in 2017 to 5.87 lakhs in 2018, i.e. a 51% increase in just one year.

To support MSMEs, India’s government has initiated various schemes to help entrepreneurs meet their financial needs.

Below is the detailed information about the various loan facilities that can be availed to start or expand the business.

Loan facilities available for MSMEs

1. Mudra Loan

Mudra Loan is offered under the Pradhan Mantri Mudra Yojana (PMMY). This scheme was launched in the year 2015, for providing loans up to INR 10 lakh to only MSMEs/SMEs. One of the key highlights of this loan is that there is no requirement for collateral security. Further, the Mudra loan scheme is divided into three parts, i.e., Shishu Scheme, Kishore Scheme, and Tarun Scheme.

1. Shishu Scheme: Under this scheme, a loan of up to INR 50, 000 can be availed. As the name suggests, this scheme is designed for entrepreneurs who plan to start a new business or are in the start-up phase of a business.
2. Kishore Scheme: The maximum loan that can be availed under this scheme is INR 5 lakh. The scheme is for the entrepreneurs who want to expand their existing business unit; therefore if you are looking for additional funds to grow your business operations, this scheme will suit your needs. To apply for this loan, you’ll be required to produce your bank statements (of last 6 months), balance sheet (of last two years), income statement, projected balance sheet (for 1 year), MOA’s and AOA’s, and any sales made before applying for the loan.
3. Tarun Scheme: If your loan requirement is more than INR 5 lakhs, this scheme is the one that you should choose. Under Tarun Scheme, the maximum loan amount is INR 10 lakh. Here, the documents to be produced are the same as the ones required for the Kishore scheme. However, apart from that, if you belong to any special caste category, such as SC, ST, OBC, etc., you’ll be asked to provide the certificate of the same.

Eligibility

• The minimum and maximum age limit of the applicant should be 18 and 65 years, respectively.
• Both new as well as existing business units can apply for the loan.
• Maximum credit facility available under this scheme is INR 10 lakhs.
• All commercial banks, regional rural banks, NBFCs are eligible to be the lenders of MUDRA loans.
• The NPAs of the institutions mentioned above should be 6%, 10% and 15% for RRBs, private and public banks respectively.

There is no processing fee to be paid for Shishu and Kishore loan; however, the processing fee to be paid is 0.5% of the loan amount for the Tarun loan. All-new, as well as existing business units, are eligible to apply for this loan. The repayment period typically ranges between 3 to 5 years.

Documents required  to apply for Mudra Loan Scheme:

• Identity proof (Pan card, Aadhar, Voters ID)
• Address proof (Electricity bills, passport, rent agreement)
• Birth Certificate
• Bank Statement
• Caste certificate
• Ownership proof (office, shop, etc.)
• ITR/Sales tax returns
• Business Project Report (this report consists of all the information related to, business plan, buying of raw materials, supplier’s details, selling price, purchasing price, machinery purchased, etc.) The project report is considered to be the most important while applying for the loan. Most loan applications get rejected only because the project reports are not up to the bank’s expectations. Thus, always dedicate extra efforts while preparing a project report.

Mudra Loan is like a Term Loan, where you’ll be required to repay the loan amount within a specified period. The interest rate on this loan varies from bank to bank.

2. Credit Guarantee Funds Trust for Micro and Small Enterprises (CGTMSE)

The CGTMSE scheme is operated by the Credit Guarantee Fund Trust (CGFT). This scheme was launched in 2000 by the government of India, Ministry of MSME and SIDBI. Under this scheme, you are eligible to get a loan of up to INR 2 crores without any collateral or third-party guarantee.

Eligibility

• The maximum loan that can be availed under this scheme is 2 crores.
• Entities such as Educational institutions, agriculture, Self-help groups, training institutions and individuals involved in retail trade are not eligible to apply for this loan.
• New, as well as existing SMEs, are eligible to borrow.
• Lending institutions eligible to provide loans are; RRBs, SIDBI, NSIC, NEDFi, NBFCs, SFBs and selected commercial banks.

Guarantee Cover

The maximum guarantee cover available is 85%. However, this cover percentage depends on the amount of loan.

• Up to 5 lakhs – 85% of the amount in default subject to a maximum of 4.25 lakhs
• Above 5 lakhs & up to 50 lakh – 75% of the amount in default subject to a maximum of 37.50 lakhs
• Above 50 lakhs & up to 200 lakh – 75% of the amount in default subject to a maximum of 150 lakhs

Guarantee Tenure

The loan can be taken for  5 years, which can then be renewed for another 5 years. Thus, coverage is provided for 10 years.

Guarantee Fee

The guarantee fee is further divided into 3 categories;

• Up to 5 lakhs – 1.00+ Risk premium
• Above 5 lakhs and up to 50 lakhs – 1.35+ Risk premium
• Above 50 lakhs and up to 2 crores - 1.80+ Risk premium

The guarantee fees should be paid before 15th  April.

Hybrid Security

Earlier the loan availed under this scheme was not allowed to be backed by any collateral security, thus making it a completely unsecured loan. However, with the introduction of the Hybrid security feature, collateral for a part of the credit facility is allowed, and the remaining is covered under CGTMSE. So if you need a credit facility of,  say,  1 crore, and you also have a house worth INR 25 lakhs to offer as collateral. In this case,  75% of the loan amount will be covered under CGTMSE and 25% as collateral security. This feature helps to instil a sense of confidence in banks while offering the loan to an entrepreneur.

Please note – If you have a good and viable project idea, your chances of getting a loan are higher.

3. Prime Minister’s Employment Generation Programme (PMEGP)

Launched in 2008, this scheme was formed by combining PMRY (Pradhan Mantri Rojgar Yojana) and REGP (Rural Employment Generation Programme). It operates under the Ministry of MSME with the main purpose of generating employment opportunities.

Eligibility

• Only new business units and micro-units are eligible to apply for the loan.
• The age of the borrower should be 18 years or above.
• The minimum education criterion is 8th pass for individuals.
• The maximum loan amount for the manufacturing business is INR 25 lakh, and for the Service sector, it’s INR 10 lakh.

In the PMEGP loan scheme, the margin money is 10% for individuals falling in a general category, while it’s 5% for the individuals falling under SC/ST/OBC. Women entrepreneurs are also offered 5% margin money. So what does margin money mean? Suppose you want a loan of up to INR 10 lakhs, now the bank won’t provide you with the entire 10 lakh amount right away. The bank wants you to invest some money from your pocket; therefore if the margin is set at 10% for the 10 lakhs loan, you will be required to pay INR 1 lakhs in advance. The government also grants a subsidy of 15-35%, and this rate varies as per the following categories:

• General – 15% (Urban) and 25% (Rural)
• Reserved – 25% (Urban) and 35% (Rural)

Documents required

• Aadhar card
• Voter ID card
• PAN card.
• Bank details.
• Education details
• Project Report
• EDP (Entrepreneurship Development Programme) certificate (if you need a loan of more than 5 lakh, 10 days training is required and a loan amount of fewer than 5 lakhs, 6 days training is to be taken).

The application can be submitted online through the PMEGP web portal.

Information on MSME loans provided by selected commercial banks.

Below is the list of popular banks that provide MSME loans to support the entrepreneurs. Please note that the interest rates mentioned below keep fluctuating and are based on your business’s financial stability.

• SBI MUDRA Loan – The bank’s maximum credit facility is 20 crore, and the interest rate starts from 9.75%. The processing fee is 2% of the loan amount and the repayment period is 10 years.
• ICICI Bank - The minimum interest rate set by ICICI for MSME loans is 13%. One can avail loan of up to 2 crores without providing any collateral.
• Bajaj Finserv – Bajaj Finserv offers a loan facility of up to INR 20 lakh, with a processing fee of 3% of the loan amount.
• HDFC Bank – Under HDFCs SME loans, up to 75 lakh credit facility can be availed. The processing fee is 2.50% of the loan amount, and the interest rate starts from 13%. The repayment tenure is 4 years.

The article provides a detailed explanation of various schemes provided by governments of India to support the MSMEs. These loan schemes help small business owners meet their working capital requirements, expansion plans, etc. and it also eventually helps generate employment opportunities.

Also read:

1) MSME – Industries that form a Foundation for a Robust Economy
2) How is the Government helping Small Businesses & Startups fight the financial crisis?
3) How to Apply for a Mudra Loan?
4) What is Business Loan? A Complete Guide.

FAQs

Q. What are different types of loans available as MSME Loans?

Ans. MSME loans are available as Term Loans, Working Capital loan, MUDRA Loan, PMEGP, CGTMSE, etc.

Q. What is a Working Capital loan?

Ans. To arrange to finance for working capital, a working capital loan is required. Working capital is needed to run day to day business operations.

Q. How to finance working capital?

Ans. Working capital can be financed through short term and long term loans.

1. Short term Bank loans – Two types of credit facilities are offered, i.e. Fund Based and Non-Fund Based. Under Fund Based facilities, you’ll be given cash credit (helps you to buy inventory, pay accounts receivables etc.), Overdraft, Bill purchase and Bill discounting (bank advance against accounts receivables), Pre-shipment & Post shipment finance (for exporters). Under Non-fund based facility, Letter of credit and Buyers credit facility, and Bank guarantee is available.
2. Long Term Financing - Bank loans such as Term Loan, Loan against property etc. helps to finance the working capital.

Q. What financial documents are required to avail of MSME Loans?

Ans. Sales tax documents, Bank statement (12 months), Income statement (last 24 months), other tax documents, and partnership deed copy (if it’s a partnership firm).

Q. How to apply for the MSME loan online?

Ans. The MSME loan can be applied on the SIDBI platform called Uday Mitra Portal.