Government Sanctions Mutual Credit Guarantee Scheme to Boost MSME Manufacturing While the loan coverage is capped at INR 100 crore, the total project cost can exceed this amount, provided at least 75 per cent is allocated for equipment and machinery.

The Government of India has taken a significant step toward strengthening the Micro, Small, and Medium Enterprises (MSME) sector by approving the Mutual Credit Guarantee Scheme (MCGS-MSME). This initiative, which fulfills a key budget announcement for 2024-25, is designed to enhance credit availability for MSMEs, particularly those involved in manufacturing. By offering a 60 per cent credit guarantee on loans of up to INR 100 crore for the purchase of plant and machinery, the scheme aims to catalyze growth and modernize production capabilities. This initiative will also reinforce India's 'Make in India' vision by encouraging investment in the manufacturing sector.

India's MSME sector plays a crucial role in the country's economy, contributing 17 per cent to the GDP and employing over 27.3 million workers. However, one of its most persistent challenges has been access to adequate financing, particularly for capital-intensive investments in equipment and machinery.

Dr. HP Singh, chairman & MD of Satin Creditcare Network Ltd., emphasized the critical role of this initiative, stating, "The $530 billion credit gap has long been a major barrier to the growth of India's MSME sector, limiting access to funds needed for expansion and modernization. MCGS-MSME is a transformative step in bridging this gap, offering 60 per cent guarantee coverage on loans up to INR 100 crore. This initiative encourages financial institutions to lend more confidently to small and medium manufacturers."

The scheme is structured to alleviate financial stress on MSMEs by providing a phased guarantee fee system, making it easier for businesses to secure funding without the burden of immediate high costs.

Salient features of the scheme

The MCGS-MSME scheme provides a structured approach to credit guarantees, ensuring broader access to capital. Key features to keep in mind is that the borrowers must be registered MSMEs with a valid Udyam Registration Number and the loan amount is only up to INR 100 crore per MSME.

Another aspect to note is that while the loan coverage is capped at INR 100 crore, the total project cost can exceed this amount, provided at least 75 per cent is allocated for equipment and machinery.

In terms of repayment, loans up to INR 50 crore have a repayment period of up to eight years, with a moratorium of up to two years. Larger loans may have extended repayment schedules. The scheme has no annual guarantee fee for the first year, followed by a 1.5 per cent fee for the next three years and a 1 per cent annual fee thereafter.

As for the duration, the scheme will be applicable for loans sanctioned over four years or until cumulative guarantees of INR 7 lakh crore are issued. By facilitating long-term funding, the MCGS-MSME scheme is expected to trigger a new wave of private investment in the manufacturing sector.

Shantanu Bairagi, CEO of Veefin Capital, highlighted the broader economic implications of the scheme, saying, "The MCGS-MSME scheme can turbocharge India's much-needed private investment cycle by kindling capital investments by the MSME sector. Till now, private investment was primarily driven by large corporate houses, who have better access to lenders and debt capital markets for long-term funding. This scheme is expected to help MSMEs tap long-term funds but also benefit lenders, especially banks, who need diversification of asset base and better returns."

With the Government's ambition to increase manufacturing's contribution to GDP from 17 per cent to 25 per cent, the MCGS-MSME scheme is expected to serve as a catalyst for industrial expansion.

Manish Shah, MD & CEO of Godrej Capital, explains the scheme's potential to empower small businesses by saying, "Access to credit has been a persistent challenge for MSMEs, often hindered by collateral requirements and high interest rates. The Mutual Credit Guarantee Scheme (MCGS-MSME) is a transformative step in addressing this issue by reducing lender risk through guarantee schemes. By offering 60 per cent credit coverage, the scheme enhances lender confidence and fosters greater financial inclusion."

Furthermore, Shah pointed out the long-term implications for MSMEs, noting, "With easier access to credit, businesses can strengthen their cash flow, unlock new growth opportunities, and build more resilient supply chains. By easing collateral requirements, MSMEs will gain greater flexibility to scale operations, invest in technology and innovation, and expand their workforce, thereby impacting employment."

The government's proactive approach in addressing funding constraints through this scheme marks a significant shift toward strengthening India's manufacturing sector. As the MCGS-MSME takes effect, it holds the potential to not just be a financial mechanism, but a transformative policy intervention aimed at empowering MSMEs growth.