Mutual Credit Guarantee Scheme for MSMEs-Features, Eligibility & Benefits Explained

In a significant move to empower the micro, small, and medium enterprises (MSMEs) sector, the Indian government has introduced a new credit guarantee scheme aimed at providing financial support for their growth and expansion.

The Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSME), announced in the Union Budget for FY 2025-26, is designed to address the financial needs of MSMEs, especially for the procurement of equipment and machinery.

This innovative scheme promises to be a game-changer for MSMEs looking to scale their operations and boost their manufacturing capabilities. Here’s a detailed look at the features and eligibility criteria of this new scheme.

What is the Credit Guarantee Scheme for MSMEs?

The MCGS-MSME is a credit guarantee scheme that extends collateral-free credit to MSMEs, enabling them to procure the necessary plant and machinery required for business expansion. The scheme offers a significant 60% guarantee coverage for credit facilities of up to Rs 100 crore, provided by the National Credit Guarantee Trustee Company (NCGTC).

The goal is to make it easier for MSMEs to access financial resources from banks and financial institutions, thereby fostering growth in the manufacturing sector and contributing to the Make in India initiative.

Key Features of the MCGS-MSME Scheme

• Credit Guarantee Coverage: The MCGS-MSME will offer 60% credit guarantee coverage to Member Lending Institutions (MLIs), ensuring that loans to eligible MSMEs for machinery and equipment procurement are covered up to Rs 100 crore. This will significantly reduce the risk for lending institutions and make them more willing to provide loans to MSMEs.
• Collateral-Free Loans: One of the most attractive features of the MCGS-MSME is that it allows MSMEs to access loans without the need for collateral. This is especially beneficial for small businesses that may not have substantial assets to pledge as collateral for loans.
• Flexible Repayment Terms: Loans up to Rs 50 crore will have a repayment period of up to 8 years, with a moratorium period of up to 2 years on principal repayments. For loans exceeding Rs 50 crore, the repayment schedule and moratorium period can be adjusted to accommodate the MSME's financial capabilities.
• Eligibility for a Wide Range of MSMEs: The scheme is accessible to all eligible MSMEs across sectors, provided they meet the necessary criteria outlined below.
• Annual Guarantee Fee Structure: The annual guarantee fee will be nil during the year of sanction. For the next three years, the fee will be 1.5% per annum of the loan outstanding as of March 31 of the previous year. After that, the fee will reduce to 1% per annum of the outstanding loan balance.
• Operational Duration: The MCGS-MSME scheme will be available for a period of four years from the date the operational guidelines are issued, or until a cumulative guarantee of Rs 7 lakh crore is issued, whichever comes first. This means MSMEs have a limited but substantial window to take advantage of the scheme.
• Focus on Manufacturing and Equipment Procurement: The scheme specifically targets loans for the purchase of plant and machinery or equipment, helping MSMEs increase their production capacity and improve efficiency. This aligns with India’s push to strengthen its manufacturing sector and become a global manufacturing hub.

Eligibility Criteria for the MCGS-MSME Scheme

To avail of the benefits under the MCGS-MSME scheme, MSMEs must meet certain eligibility requirements:

• Udyam Registration: MSMEs must have a valid Udyam Registration Number. This is a government-issued certification that authenticates an enterprise as an MSME under the Ministry of MSME.
• Loan Amount and Project Cost: The loan amount covered under the scheme cannot exceed Rs 100 crore. While the loan limit is capped, the project cost can be higher, provided that at least 75% of the project cost is dedicated to the purchase of equipment or machinery.
• Repayment Period: For loans up to Rs 50 crore, the repayment period is capped at 8 years, with a moratorium of up to 2 years on the principal amount. For loans above Rs 50 crore, the repayment schedule can be adjusted depending on the size of the loan.
• Initial Deposit: MSMEs applying for the scheme will need to deposit 5% of the loan amount as an initial contribution at the time of application for the guarantee cover.
• Loan Purpose: The primary purpose of the loan under this scheme is for the purchase of plant, machinery, or equipment that will help in expanding the MSME’s business operations.

Benefits of the MCGS-MSME Scheme

• Enhanced Access to Credit: By reducing the risk for lending institutions, the scheme will make it easier for MSMEs to access the funds they need to grow, especially for capital-intensive sectors like manufacturing.
• Support for Manufacturing Growth: The focus on procuring plant and machinery will help MSMEs enhance their production capabilities, thereby contributing to the growth of India’s manufacturing sector and boosting the country’s Make in India initiative.
• Increased Competitiveness: With access to modern equipment and technology, MSMEs will be able to improve product quality and efficiency, enabling them to compete more effectively in both domestic and international markets.
• Encouraging Innovation: The scheme’s focus on equipment and machinery procurement encourages MSMEs to innovate and adopt advanced manufacturing techniques, further enhancing their business operations.
• Economic Impact: By supporting MSMEs, the scheme will indirectly contribute to job creation, income generation, and overall economic growth.

How to Apply for the MCGS-MSME Scheme?

MSMEs interested in availing of the MCGS-MSME scheme must apply through the Member Lending Institutions (MLIs) that participate in the scheme. These institutions will evaluate the loan applications, and once approved, they will process the loan and provide the necessary guarantee cover under the scheme.

It’s important to note that the scheme’s operational guidelines will be issued shortly, and MSMEs should stay updated to ensure timely application.

The Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSME) is a significant step towards strengthening the MSME sector in India. By offering collateral-free loans and providing a 60% guarantee coverage, the scheme aims to empower MSMEs to expand their operations, particularly in the manufacturing sector.

 With its focus on equipment and machinery procurement, the scheme is expected to fuel the growth of India’s manufacturing capabilities, creating more jobs and promoting economic development.

If you're an MSME looking to take your business to the next level, this scheme presents a unique opportunity to access the necessary financial support. Stay informed about the operational guidelines and ensure your business is ready to take advantage of this transformative initiative.

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