written by Khatabook | July 13, 2021

Top 5 Government Loan Schemes for Small Business in India

As per the World Economy Report of 2020 Quarter one, the International Monetary Fund (IMF) has indicated that India is one of the fastest growing economies in the world and a major portion of India’s GDP is being contributed by SMEs. Hence, promotion of Micro, Small and Medium Enterprises (MSMEs) is crucial. For this, the Government has introduced Loans for small business through which business owners can avail financial assistance to grow their business. This assistance is both in the form of a subsidy by the Government and also through devising schemes for Banks to provide effective loans to the upcoming business ventures. Assistance may be in the form of funding Capital Working requirements, term loans, raw material purchase assistance, bill discounting, technology up-gradation schemes, marketing assistance, schemes for special sectors and industries which the Government wants to prosper, and many more. The government may form special Trust Funds or set up institutes or Departments to look after the governing of such schemes. It becomes very important that small businesses know about these schemes of government to avail benefits from the same and help contribute towards economic value-addition of the nation.

Top 5 Government Loan Schemes for Small Business in India:

Pradhan Mantri Mudra Yojana (PMMY)

The Pradhan Mantri Mudra Yojana (PMMY) works on the theme of “fund the unfunded”. The Government of India has established a Micro-Units Development and Refinance Agency (MUDRA) Organisation for providing loans to micro-businesses. With low cost and worth of credit, these loans have proved very helpful for businesses. 

Loans are classified as below:

Tarun loans: INR 5 Lakhs to INR 10 Lakhs

Kishor Loans: INR 50,000 to INR 5 Lakhs

Shishu Loans: Up to INR 50,000

Loans are provided without any mortgage under the MUDRA Loans in the areas of agriculture, manufacturing, retail, and services.

Eligibility Criteria:

  • Small Business Owners in rural and urban areas.
  • Non-Corporate Small Business (NCSB). For example, small industries, service sector units.

Credit Guarantee Scheme (CGS)

The Credit Guarantee Scheme (CGS) also provides for collateral-free finance to the MSME on payment of the Guarantee fee to the bank. This scheme is implemented by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which in turn, is established by the Ministry of MSMEs and Small Industrial Development Bank of India (SIDBI). The loan is a maximum amount of 200 Lakhs, and special preference is given to women.

Loan Guarantee Cover is a maximum amount of below percentage of sanctioned amount,

  1. 75% for Credit up to INR 500 lakh.
  2. 85% for credit up to INR 100 lakh.

Fees are charged up to 1% per annum of the sanctioned amount.

Eligibility Criteria:

  • Manufacturing industries
  • Services activities except for Educational Institutions, Self Help Groups, and Training Institutions.

MSME Loan in 59 Minutes

A quick business loan in India is imparted through a portal provided by the Government of India wherein a loan of amount from INR 1 Lakh up to INR 5 Crores is approved in just 59 minutes and takes 8 – 10 days for processing. This loan bears an 8.5% interest rate. It allows credit facilities to new and existing businesses.

Eligibility Criteria:

  • Salaried individual
  • All businesses including

-proprietary concern 

-partnership firm

-Private Ltd.

-Public Company

-Other legal entities

Documents required:

  • Income of borrower
  • Existing credit facilities
  • Repayment capacity of the borrower
  • GST Verifications
  • Income tax verifications
  • Bank account statements for the last 6 months.
  • KYC Details
  • Other factors set by the financial lender.

Also Read: How to Apply for the Best Business Loan in India? - Types of Govt. Loan Schemes

Stand-Up India

Stand-Up India is a scheme of the Government that has been set up for financing the Scheduled Caste, the Scheduled Tribe, and the Women Entrepreneurs. It has been set up by the SIDBI Bank. According to this scheme, every bank or every branch of a bank is required to finance or lend money to at least one Scheduled Caste (SC) or Scheduled Tribe (ST) borrower and at least one Woman borrower for setting up an enterprise for the very first time in the any of the fields of manufacturing, services, trading activities or agriculture and allied activities. 

If the borrower is a non-individual, then such borrower to be financed requires at least a 51% stake in such enterprise. The loan provided is a composite loan anywhere between Rs. 10 Lakh up to Rs. 100 Lakh which can be both as a Term Loan and Working Capital Finance. 

The loan will be estimated to cover 85% of the project cost including the Working Capital. However, if the owner's contribution is included with other borrowings, the Stand-Up India scheme exceeds 15% of project cost. When this happens, the estimated loan won’t be applicable. In this case, the borrower needs to bring in a minimum of 10% of the project cost as own contribution. 

The rate of Interest charged is the lowest applicable rate for the respective bank which does not exceed MCLR (Marginal Cost of Fund-based Lending Rates, that is, the minimum rates below which banks are not allowed to lend) plus 3% plus tenor premium and is repayable in 7 years with a maximum moratorium period of 18 months.  The loan requires security or collateral or a Guarantee as decided by banks.

Eligibility Criteria:

  • Borrower must be a SC or ST or a Woman of 18 years and above.
  • Finance must be lent to a green-field project. This means that the venture of the borrower in any of the fields of trade, agriculture, allied activities, manufacturing, or services should be the first-time venture of the beneficiary.
  • Borrower should not be in default to any other Financial Institution.
  • At least 51% stake must be held by a SC or ST or Woman, in case of a non-individual enterprise.

National Small Industries Corporation Subsidy (NSIC)

The NSIC is a Government enterprise under the MSMEs, certified by ISO. It aims to support the growth of MSMEs by providing services including finance, marketing, technological advancement, and other business related services across the country. The NSIC has initiated two schemes to promote the growth of MSMEs, which are:

  • Marketing Support Scheme – The scheme supports the development of any business by devising schemes for areas such as  Consortia and Tender Marketing, Single-point Registration, Infomediary services, marketing Intelligence, Space Marketing, Machines and Equipment selling, and other Digital Services. Such a scheme is crucial as the MSMEs must be aided for them to grow in the current competitive market.
  • Credit Support Scheme – The NSIC aims to support MSMEs by way of assistance for Raw Material purchases which helps the MSME to concentrate on their core manufacturing activities. Supported credit is up to 180 days and security in the form of a Bank Guarantee from approved banks is required.

The Rates of Interest for Credit Support Scheme are as below:

Particulars

Effective Rate of Interest p.a.

For Up to 180 Days

Micro

Small 

Medium

1. SME Units having valid SME 1 rating

7.50%

8%

9%

2. SME Units having valid SME 2 rating

8%

8.50%

9%

3. Other units

8.50%

9%

9%

For Above 180 days

     

All SME Units

1.25% per Quarter additional Interest 

Also, a Bill Discounting scheme is contained under the credit-support scheme which applies only to manufacturing and service SMEs and not the trading SMEs. Interest Rates are as below:

Particulars

Effective Rate of Interest p.a.

For Up to 180 Days

Micro

Small 

Medium

1. SME Units having valid SME 1 rating

6.50%

7%

8%

2. SME Units having valid SME 2 rating

7%

7.50%

8%

3. Other units

7.50%

8%

8%

For Above 180 days

     

All SME Units

1.25% per Quarter additional Interest 

Also Read: Digital Khata and How Khatabook Helps Businesses

PMEGP (Pradhan Mantri Employment Generation Program)

The Scheme works on two levels. It receives approval at the National Level where the Khadi and Village Industries Commission (KVIC) functions as the Nodal Agency. And this approved loan is disbursed to the account holder through the state-level agency which are the State KVIC Directorates, State Khadi and Village Industries Board (KVIBs), District Industries Centre (DICs) and designated banks.

The Maximum Project cost in the admissible sector is INR 25 Lakhs and in the business sector, it is INR 10 Lakhs. A loan is provided as a subsidy at an amount of the following percentage of the Project cost while the rest of the loan is provided by banks.

Categories

Urban

Rural

General 

15%

25%

Special

25%

35%

Eligibility Criteria:

  • Any Individual above 18 years of age.
  • Minimum Qualification of 8th-grade pass for projects costing above INR 10 Lakhs for manufacturing and above INR 5 Lakhs for Business/Service sector.
  • Subsidy is available for only new projects.
  • Units already availed subsidy from any other Government Schemes are not eligible.

Credit Link Capital Subsidy Scheme for Technology Upgradation

The objective of the scheme is to provide for technology up-gradation in MSEs. That means an upfront 15% subsidy is provided in the approved 51 sub-sectors. This helps the businesses to set up technological driven systems and plant and machinery with proper technology and duly approved under the scheme guidelines.

Eligibility Criteria:

  • Micro and Small Enterprises (MSEs) having valid UAM Number.

Some Basic Eligibility Criteria for availing any Government Loan from Banks

Apart from the specific eligibility criteria for the schemes, Banks usually provide loans based on the following criteria which need to be fulfilled whether mentioned or not. These may vary from lender to lender but the most common ones are mentioned below. Let us take a look at them:

Business type

All micro-enterprises engaged in trading, manufacturing, and services sector including professionals such as architects, doctors, CAs, etc.

Residential Status of the Applicant/ Beneficiary

Resident of India

Age Limit

Generally above 18 years. 

Between 25 years and 66 years

Status of the Business

New or existing enterprises

Documents Required:

Application form

It is provided by the banks. Must be filled and duly signed.

KYC Documents

Proof of Business entity, the partnership deed, incorporation or Registration Certificate, Shop-Act license, and establishment certificate, Articles of Association (AOA), Prospectus copies, and any other license issued by the respective authorities.

PAN Card

  • Of directors/proprietors/promoters/partners
  • Of the business entity itself

Financials

  • Projected turnover and current year performance
  • Tax audit reports, balance sheets, profit and loss reports, VAT returns, audited and provisional financial statements, and project reports, etc.

Address Proof

  • Of the business entity
  • Of directors/promoters/partners/proprietors

Bank Statements

For the last 6 months

Photographs

Passport-size photograph of applicant/co-applicants

How to Apply?

Availing government loans for small-scale businesses will not cause you much sweat. Since most government loans are given through banks and financial institutions, you can directly approach them to avail loans. You can visit the nearest branch of the bank or financial institution who will guide you on the loan application process.

Some lenders will also allow you to apply for business loans online on their respective websites. You can visit their websites, fill up the application form provided, upload the relevant documents, and submit it. Once you complete the process and the verification is done from the bank’s end, the loan amount will be credited directly into the bank account you provided during the application process.

Also Read: Can A Government Employee Run A Business In India

FAQs

1. What is an MSME?

An MSME is a Ministry of Micro, Small, and Medium Scale Business classified on the basis of their annual turnover and Investment made in business ventures.

2. What are the points considered by the bank to approve a loan?

  • The age of the borrower
  • Capital invested in the project
  • Whether the project is new or existing
  • Type of business
  • Estimated Annual turnover
  • Individual’s Credit Score
  • Amount of Credit sought and Cost of Project.

3. What are the minimum and maximum loans available under the schemes?

There is no minimum limit however maximum limits are set up as per the respective schemes based on various other factors.

4. What is the difference between a Government Subsidy and a Government Loan?

A Subsidy is a kind of assistance given to reduce the financial burden on the borrower. It may be in the form of providing funds, or reduction in Interest rates, etc. It also includes Government Loans. However, Government Loans are the amounts sanctioned by the Government as Loan which is to be repaid by the borrower as per the terms of the loan. 

5. How to register for loan Schemes introduced by the Government of India?

The following steps are to be followed for loan Schemes application:

  1. Get registered on the Portal
  2. Complete the authentication process for login
  3. Agree to the terms and conditions
  4. Enter the other information required in the portal 
  5. Upload the required documents.

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