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About MSME loans in India

MSME Loans, also known as Micro, Small, and Medium Enterprise Loans, are a type of loan that you can get if you own a small or medium-sized business, or if you’re an entrepreneur. These loans provide you with money that you can use to help your business grow and succeed. You can use the loan for things like buying new equipment or inventory, paying your employees, or expanding your business.

In India, there are many banks and lenders that offer MSME loans to their customers. The interest rate charged for the loan may be different depending on which bank or lender you choose. Overall, MSME loans can be a helpful resource for business owners who need some extra money to help their business succeed.

Additionally, we will talk about the interest rates for business loans provided by top Banks/NBFCs, as well as the features, requirements, fees, and other important information about MSME loans.

MSME Explained

The definition of MSME now takes both investment and annual turnover into account. This means that more firms and enterprises are now eligible to be classified as MSMEs and avail of the benefits that come with it.

The government has also increased the investment limit for the classification of MSME units, which means more businesses can now qualify for MSME schemes.

The criteria for the classification of MSMEs is now uniform for both manufacturing and service enterprises. Here are the new investment and turnover limits for each category:

  • Micro: Investment does not exceed Rs.1 crore and turnover does not exceed Rs.5 crore
  • Small: Investment does not exceed Rs.10 crore and turnover does not exceed Rs.50 crore
  • Medium: Investment does not exceed Rs.20 crore and turnover does not exceed Rs.100 crore

Overall, the new definition of MSME provides more opportunities for small businesses to qualify for MSME schemes and receive the benefits that come with it. If you own a small business, it’s worth checking if your business now qualifies under the new definition.

MSME Loan Highlights

If you own a small business and need some financial support, MSME loans can be a good option. Here are the important details you should know about MSME loans:

Interest Rate: The interest rate you will be charged for an MSME loan depends on your business requirements and credit profile.

Loan Amount: You can borrow any amount you need as there is no minimum limit, and you can get a maximum of up to Rs. 2 crores for unsecured business loans. However, this amount can be exceeded depending on your business requirements.

Repayment Tenure: You can choose a repayment period of 12 months to 5 years. If needed, it can exceed the said period depending on your business requirements.

Collateral/Security: Unsecured business loans do not require any collateral or security.

Processing Fee: The processing fee for an MSME loan can range from nil to 4% of the sanctioned loan amount.

Foreclosure Charges: Foreclosure charges can range from nil to 5% of the outstanding principal amount.

Part-payment Charges: Part-payment charges can range from nil to 4% of the outstanding principal amount.

Subsidy: Some selected financial institutions offer subsidies for MSME loans.

Credit Facilities: MSME loans provide different credit facilities such as working capital loan, bill discounting, overdraft, term loan, cash credit, letter of credit, bill of purchase, merchant cash advance, and loans under government schemes.

Overall, MSME loans can be a great help for small businesses to obtain the financial support they need. It’s worth exploring the options that are available to you to see if an MSME loan is the right fit for your business.

What is the purpose of MSME loans?
Purpose of MSME Loans

MSME Loans can be a great help for business owners who need funding for various reasons. Financial institutions offer these loans for the following purposes:

  • Starting a new business or expanding an existing one
  • Purchasing necessary plant and machinery such as lab equipment, electrical appliances, or furniture
  • Constructing buildings or acquiring land or commercial properties
  • Launching new products or paying suppliers through bill discounting
  • Meeting working capital requirements like paying salaries, purchasing raw materials, and stocking inventory
  • Buying new or used machinery, equipment, or vehicles
  • Getting additional funding for any other business-related needs.

What are the eligibility criteria for obtaining an MSME loan?

MSME Loan Eligibility

To get approved for an MSME loan, you need to meet certain eligibility criteria set by the lender. These requirements can differ from bank to bank and even vary depending on the scheme offered. However, some general criteria you need to fulfil are:

Type of Business: Your business must fall under either the manufacturing or service sector.

Size of Business: The size of your business should be classified as Micro, Small, or Medium, and the investment should be within the range mentioned below:

  • Manufacturing Sector: If you’re in the manufacturing sector, your business size can be classified as Micro if your investment is less than Rs.25 lakh, Small if it’s less than Rs.5 crore, and Medium if it’s less than Rs.10 crore.
  • Service Sector: For the service sector, the investment required is less, with Micro being less than Rs.10 lakh, Small being less than Rs.2 crore, and Medium being less than Rs.5 crore.

Age: You should be at least 21 years old at the time of loan application and a maximum of 65 years old at the time of loan maturity.

Business Vintage: Your business should have a minimum vintage of 1 year.

Annual Business Turnover: The annual business turnover criteria will vary from bank to bank.

Repayment History: You should have a good repayment history and financial stability.

No Previous Loan Default: You should not have any previous loan defaults with any bank.

Credit Score: Lenders will consider your credit score to determine your eligibility

Business Entities Eligibility

If you’re looking to apply for an MSME loan, there are different types of entities that are eligible to apply. These include individuals, startups, MSMEs, women entrepreneurs,business owners, self-employed professionals, and individuals belonging to the SC/ST/OBC category, along with other business entities.

Apart from these, private or public limited companies, sole proprietorships, partnership firms, and limited liability partnerships (LLPs) can also apply for MSME loans. However, these entities should be engaged only in the trading, services, and manufacturing sectors.

What documents are required for MSME Loans?

When applying for an MSME loan, it is important to know what documents are required by the lender. Here are some of the documents you may need to submit:

Application Form and KYC Documents

You will need to fill out a loan application form and attach passport-sized photos. Additionally, you will need to provide KYC documents such as a passport, Aadhar card, Voter’s ID card, driving licence, PAN card, and utility bills for both you and any co-applicants.

Business Documents

You will need to provide your business PAN card, its address, and proof of how long it has been operating. This information helps the lender determine the stability and legitimacy of your business.

Financial Documents

You will need to submit your last year’s Income Tax Return (ITR) along with the past six months’ bank statements. These documents help the lender evaluate the financial health of your business and your ability to repay the loan.

Business Establishment Certificate or Incorporation Letter

You will need to provide evidence of your business establishment, such as a Business Establishment Certificate or Incorporation Letter. This document confirms that your business is registered and operating legally.

Caste Category Evidence

If you belong to an SC/ST or OBC category, you may need to provide evidence of this. This information is required for lenders to meet their priority sector lending targets and offer special schemes for certain categories of borrowers.

Other Documents

Depending on the lender, you may need to provide additional documents as per their requirements.

In summary, submitting all the required documents is necessary to complete your loan application and obtain approval from the lender. Make sure to carefully review the lender’s document checklist and provide all the necessary information to increase your chances of approval.

How to apply for MSME Loan?

When you want to apply for an MSME loan, there are two ways to do it. Some lenders offer an online application facility where you can fill out the form with your information and submit it through their website.

If you prefer a more personal approach, you can visit the nearest branch of the lender and request an application form. Before you go, you may want to call ahead and ask them what documents you’ll need to bring with you.

What are some of the popular MSME loan schemes ?

The Indian government has introduced various MSME loan schemes through the Ministry of MSME (MoMSME) to support Micro, Small, and Medium Enterprises (MSMEs). These schemes are offered by different Banks/NBFCs to help MSMEs in their financial requirements.

Some of the popular MSME loan schemes initiated by the Indian government and offered by financial institutions are:

  • Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): This scheme provides collateral-free loans of up to Rs. 2 crores to new and existing micro and small enterprises. Under this scheme, the government provides credit guarantee cover to the lenders, thereby encouraging them to lend to MSMEs.
  • Credit Linked Capital Subsidy Scheme (CLCSS): The CLCSS scheme aims to provide capital subsidies to MSMEs for the modernization and upgradation of their technology. The scheme provides a 15% capital subsidy on the investment made in plant and machinery, subject to a maximum of Rs. 15 lakhs.
  • Credit Guarantee Scheme: The Credit Guarantee Scheme aims to provide collateral-free credit to micro and small enterprises. Under this scheme, the government provides credit guarantee cover to the lenders up to 75% of the credit facility.
  • MUDRA Yojana under PMMY: MUDRA stands for Micro Units Development and Refinance Agency. Under this scheme, small entrepreneurs can avail of loans up to Rs. 10 lakhs for their business needs. The loans are provided under three categories – Shishu, Kishor, and Tarun – based on the stage of the enterprise.
  • National Small Industries Corporation (NSIC) Subsidy: The NSIC provides support to MSMEs by providing raw materials, machinery, and equipment on hire purchase or outright purchase basis. The NSIC also provides financial assistance to MSMEs through its various schemes.
  • Prime Minister Employment Generation Programme (PMEGP): The objective of this program is to encourage entrepreneurship among young people and create employment opportunities. It offers financial aid to individuals who aspire to establish their own enterprises. The highest permissible project cost is Rs. 25 lakhs for manufacturing and Rs. 10 lakhs for service-based ventures.
  • Prime Minister’s Rozgar Yojana (PMRY): The PMRY scheme aims to provide self-employment opportunities to educated unemployed youth in both rural and urban areas. Under this scheme, financial assistance is provided for setting up micro-enterprises.
  • PSB Loans in 59 minutes under SIDBI: This scheme provides quick loan approvals to MSMEs in just 59 minutes. The loans are provided by various public sector banks in partnership with the Small Industries Development Bank of India (SIDBI).
  • Standup India: This scheme aims to promote entrepreneurship among women and SC/ST communities. Under this scheme, loans between Rs. 10 lakhs and Rs. 1 crore are provided to at least one SC/ST and one woman borrower per bank branch for setting up a greenfield enterprise.
  • Startup India: The Startup India scheme aims to promote entrepreneurship and innovation by providing various benefits to startups, such as tax exemptions, self-certification, and a dedicated helpline. This scheme is specifically designed to support and nurture the startup ecosystem in India.

    These schemes provide financial assistance to MSMEs for various purposes like starting a new business, expanding an existing enterprise, purchasing machinery and equipment, and meeting working capital requirements.

Does an MSME loan typically require collateral or security?

Understanding MSME Loans: Secured and Unsecured Options with Collateral-Free Benefits

MSME loans are a popular choice for business owners who need financial assistance to start or expand their business. It’s important to know that MSME loans can be both secured and unsecured, but most lenders offer unsecured loans that do not require collateral or security.

Collateral-free MSME loans are a convenient option for business owners who don’t want to risk their assets as security for the loan. These loans can range up to Rs. 2 crores and can be repaid within a year or up to five years, depending on the borrower’s needs.

Financial institutions, such as banks, NBFCs, RRBs, cooperative banks, SFBs, and MFIs offer MSME loans at competitive interest rates. However, the amount of loan offered will depend on various factors, including the borrower’s credit score, creditworthiness, repayment capacity, and financial stability.

Whether you’re a new business owner or a seasoned entrepreneur, MSME loans can provide the financial support you need to achieve your business goals. With a range of benefits and features, MSME loans are a smart choice for anyone looking to start or expand their business.

What are the factors that affect MSME loan interest rates?

The factors that affect MSME loan interest rates:

  • Credit score: Your credit score is an important factor that determines your eligibility for an MSME loan and affects the interest rates you’re offered. A good credit score can help you get a lower interest rate, while a poor credit score can result in higher interest rates.
  • Income: Your income level is also considered by lenders when determining the interest rates for an MSME loan. Higher income levels usually result in lower interest rates, while lower income levels can result in higher interest rates.
  • Financial history and stability: Your financial history and stability, including your past loan repayments, outstanding debts, and income stability, also play a significant role in determining your MSME loan interest rates.
  • Creditworthiness: Your creditworthiness, which is your ability to repay loans, is also considered by lenders when determining interest rates.
  • Loan amount and repayment tenure: The loan amount you desire and the repayment tenure you choose will also affect the interest rates. Higher loan amounts and longer repayment tenures can result in higher interest rates.
  • Business stability, annual turnover, and profitability: The stability of your business, your company’s annual turnover and profitability, and the nature, tenure, and volume of your business also impact the interest rates you’re offered.
  • Company’s credit rating: The credit rating of your company is another factor that can influence the interest rates for an MSME loan. A high credit rating can help you get a lower interest rate, while a low credit rating can result in higher interest rates.

Keep in mind that different lenders may weigh these factors differently when determining your eligibility and interest rates for an MSME loan. It’s important to shop around and compare offers from different lenders to find the best deal for your business.

How does having a good credit score impact obtaining an MSME loan?

If you have a good credit score, you can get an MSME loan at lower interest rates. To learn more about credit scores and their significance in obtaining MSME loans, read on.

MSMEs can greatly benefit from having a good credit score. A high credit score of 750 or above indicates that the business has a good track record of repaying loans or credit card bills on time. This, in turn, makes it easier for MSMEs to obtain loans quickly, which is essential for their growth and expansion.

With a good credit score, MSMEs can also get loans at lower interest rates and with added benefits, such as longer repayment periods, which can ease the burden of loan repayment. This can help them manage their cash flow better and invest in their business without worrying about the financial strain of loan repayment.

Moreover, a good credit score can also help MSMEs in building a strong reputation in the market, which can attract more customers and investors. It can also improve their chances of getting business deals and partnerships with larger companies.

In short, a good credit score is essential for MSMEs to access funding, expand their business, and build a strong reputation in the market. So, it’s crucial for MSMEs to build, maintain, and manage a high credit score to reap the benefits of financial stability and growth.

What is the fee for MSME registration?

There is no fee for MSME registration, it is completely free of cost.

Who can apply for an MSME loan?

MSME loans are available to a wide range of individuals and businesses, including startups, self-employed professionals, entrepreneurs, sole proprietorships, private and public limited companies, partnership firms, Limited Liability Partnerships (LLPs), and Micro-Small and Medium Enterprises (MSMEs).

How can I apply for an MSME loan in 59 minutes?

You can apply for an MSME loan in 59 minutes through the government’s website. After submitting your application, the website approves business loans in just 59 minutes.

Is GST mandatory for MSME loans?

Yes, providing your last year’s GST return is mandatory for existing MSMEs or salaried professionals who want to start a new business.

What is the validity of the Provincial Registration Certificate (PRC)?

The Provincial Registration Certificate (PRC) is valid for 5 years.

Is there any validity period for the MSME certificate?

Yes, the MSME certificate is valid for 5 years. After the validity period ends, you need to renew your MSME certificate

Why does a credit score matter for MSMEs applying for loans?

Your credit score is important in the loan approval process. Having a good credit score, typically above 750, gives you an advantage when applying for MSME loans. Lenders assess your creditworthiness and repayment capability based on your credit score.

Is MSME registration mandatory?

MSME registration is voluntary, and businesses choose to register to access the benefits offered under it. However, MSME registration is necessary to avail of various schemes and subsidies provided by the Indian government for MSMEs.

How can I obtain a collateral-free MSME loan?

To obtain a collateral-free loan for MSMEs or startups, you can apply for an unsecured business loan. Many lenders offer unsecured business loans that are often called collateral-free loans. With collateral-free loans, borrowers do not need to submit any collateral or security to the bank, NBFC, or any other financial institution.

Is there a turnover limit for MSME schemes?

The minimum annual turnover limit varies from lender to lender, and it depends on the applicant. The turnover limit is an important factor in determining the loan amount, interest rate, and other terms and conditions.

Do MSMEs have access to machinery loans?

Yes, MSMEs, entrepreneurs, and existing businesses can access machinery loans from various banks and NBFCs. Machinery loans are a type of business loan mainly considered under equipment finance. The loan amount offered depends on the applicant’s profile, credit score, repayment capability, and the type of machinery they wish to purchase.

What is the process to check the CIBIL score of my business?

To find out your business’s CIBIL score, you can visit the official website of CIBIL and request a credit report. You are entitled to one free credit rating check per year. Alternatively, you can apply for a credit report through the post, but you will need to submit certain documents and your report will only be delivered after authentication and verification.

What does the Stand Up India scheme offer?

The Stand Up India scheme provides financial assistance to women entrepreneurs and individuals belonging to the SC/ST caste for setting up greenfield projects in sectors such as trading, manufacturing, and services.

Are there any additional services that banks offer to MSME entrepreneurs, apart from loan assistance?

Yes, banks provide other services to entrepreneurs in the MSME sector, such as financial literacy and consultancy support, as well as Rural Self Employment Training Institutes (RSEITs).

Are there specialised branches in public sector banks for MSME loans or are they available in all branches?

The Reserve Bank of India (RBI) has directed all public sector banks to open at least one specialised branch in each district for lending to the MSME sector. Presently, there are 2,032 such branches.

What other forms of support does the Indian government provide to the MSME sector besides loans?

The Indian government offers several other forms of support to the MSME sector through the Ministry of MSME. This includes promoting the use of Information and Communication Tools (ICT), developing clusters, providing skill development, enhancing manufacturing competitiveness, improving product quality, and offering market support through the Marketing Assistance Scheme.

What guidelines has the RBI issued for interest rates on MSME loans?

The RBI has instructed banks to determine interest rates on MSME loans based on the base rate only, as part of efforts to improve transparency in lending rates.

What happens if I am unable to repay my MSME loan on time?

If you are unable to repay your MSME loan on time, you may default on your loan. In such a scenario, you may be liable to pay compound interest with monthly rests to the supplier from the appointed day or the agreed day, at a rate three times higher than the bank rate notified by the RBI.

How much collateral is required for securing MSME loans?

As per RBI regulations, banks are required to provide MSME loans of up to Rs.10 lakh without requiring collateral. Depending on the financial situation and track record of the MSME units, banks may increase this limit to Rs.25 lakh.

Do MSME borrowers need a credit rating?

While a credit rating is not mandatory for MSME borrowers, it can aid in obtaining lower interest rates and processing fees.

Does the MSME sector fall under the scope of priority sector lending?

Priority sector lending is the provision of credit by banks to certain sectors that are essential for the economic and social development of the country, such as agriculture, housing, education, and the MSME sector. Therefore, the MSME sector is indeed a part of the priority sector.

Do banks have a mandate to lend to MSMEs in India?

Yes, the Reserve Bank of India (RBI) has set targets for all private and public sector banks in India to provide loans to the MSME sector as a part of their priority sector lending obligations.

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