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This article is written by Rashi Singh currently pursuing LL.B. from Campus Law Centre, Faculty of Law, University of Delhi. The below article deals with the MSME industries, and various schemes being offered to the MSMEs by the government. 

Introduction

Indian economy, as we all know, is a developing economy. Long-term growth of the economy largely depends on the young population, investment levels, healthy savings, and also its incorporation into the world economy. One sector which has become the backbone of the national economy and continuously being presented as the synonym of resilience in terms of warding off the global economic shocks and adversities is the MSME sector. In this article, we will particularly talk about the new age catalyst of the Indian economy, the MSME sector, and various loans and credit fund schemes being offered to the sector by the government.

MSMEs: A big business opportunity

Micro, Small, and Medium Enterprises (MSMEs) which are the backbone of the Indian economy are primarily engaged in the production, manufacturing, processing, or preservation of goods and commodities. MSMEs create employment opportunities and help small businesses to sustain themselves. The MSME sector enjoys benefits such as electricity, tax, and industrial subsidies. Registering your business under MSME would be beneficial for any start-up as it makes you eligible for various subsidies and loan schemes being offered by the government. Some of the reasons why the MSME registration is gaining popularity are:

  1. Funding: Finance and subsidies.
  2. Government’s support and promotion.
  3. Less capital required.
  4. Manpower training
  5. Raw material and machinery procurement.
  6. Growth in demand in the domestic market.

If you decide to register your business under the MSME Act 2006, there are various perks available such as:

  1. Bank loans (collateral free): The government of India has made free collateral credit to small and micro-businesses. It guarantees funds to small and micro-enterprises.
  2. Subsidy on patent registration: For the registration of patents, businesses registered under MSME can enjoy a 50% subsidy.
  3. Overdraft Interest Rate Exemption: A benefit of 1% for overdraft is available to the MSME sector.
  4. Protection against delayed payments: At times, buyers of various services from the MSMEs tend to delay the payments. To protect the interest of the MSME business owners the Ministry of Micro, Small, and Medium Enterprises gives them the right to collect interest on such delayed payments.
  5. Electricity subsidy: MSMEs can avail subsidies on their electricity bills through the department of electricity.
  6. Industrial Promotion Subsidy Eligibility: Government provides a subsidy for industrial promotion to the MSME sector.
  7. ISO certification charges reimbursement: MSME registered businesses are eligible to demand the reimbursement of the expenses incurred for ISO certification.

All these reasons are enough to elaborate on how the MSME registration can help to grow a healthy and fruitful start-up while enjoying these benefits.  

A brief understanding

What kind of businesses can be registered under MSME? What are the qualifications required to get your business under the MSME umbrella? Certain criteria need to be fulfilled to qualify under the MSME. The present system of MSME classification is based on the criteria of investment in plant and machinery or equipment. During Covid-19, the Government of India revised the definition of MSME.

Investment and Annual Turnover

Enterprise

Micro

Small

Medium

Manufacturing and services sector

Investment is less than 1 crore.

Turnover less than 5 crores.

Investment is less than 10 crores.

Turnover up to 50 crores.

Investment is less than 50 crores.

Turnover up to 250 crores.

Who can apply for MSME registration?

Businesses that are eligible to avail the benefits of MSME schemes need to get registered under MSME first. Eligible businesses include:

  • Proprietorship firm: A type of business owned and run by one person and in this type of business there is no distinction between the owner and the business entity.
  • Company: A legal entity formed by a group of individuals to engage in and operate a business, commercial or industrial enterprise.
  • LLP: A limited liability partnership (LLP) is a partnership in which some or all partners have limited liabilities. It therefore can include elements of partnerships and corporations.
  • Partnership firm: It is an association of 2 or more persons to carry on a business in the capacity of co-owners. All the partners share the profits and losses in the proportion of their respective owners, or as agreed between them.
  • Society or co-operative society: A society is an association of several individuals combined using a mutual accord to deliberate, govern and act cooperatively for some communal purpose whereas a co-operative society is a form of business where individuals belonging to the same class join their hands for the promotion of their common goals.
  • Trust: A legal relationship in which the legal title to property is entrusted to a person or legal entity with a fiduciary duty to hold and use it for another’s benefit.
  • Association of Persons (AOP): In this type of business, a group of persons come together for achieving a common objective and have the same mindsets. Members of the AOP can be natural or artificial persons.
  • Or any other undertaking.

MSME loans in 59 minutes

The government of India under its initiative to provide financial assistance to small businesses has launched the 59 minutes loan scheme. With an interest rate of up to 8% businesses can get a loan of up to Rs.1 crore without a branch visit of the bank. This is aimed at improving credit availability for the MSME sector. A dedicated portal for the scheme has also been launched. This portal ensures the working of the whole process digitally. Once all the necessary requirements relating to the documents and others are fulfilled, the loan will be disbursed in seven to eight working days to the applicant. Now, let us understand the procedure for availing of this loan scheme.

Documents required

  • GST Identification Number and GST login details.
  • Bank statement for six months in pdf format.
  • Last three years income tax return details in XML format and e-fillings details.
  • Details of Partner/Director both personal and educational information.

 Process involved

  • Use the official web portal to register.
  • Registration is complete after OTP verification.
  • Next some basic information will be required to fill.
  • PAN, GST, and income tax return details will be needed to fill.
  • Upload required documents.
  • Upload the bank statement for the last six months.
  • Loan purpose should be declared. Also, previous loan information should also be disclosed.
  • Select the bank from the list of banks to get your loan processed.
  • After paying the convenience fee, download the approval letter.

Other things to keep in mind

  • Actual disbursement will be done after due diligence by the banks.
  • You may be eligible for a lesser loan amount as compared to your requirement.
  • A certain percentage of the loan amount has to be contributed by the promoters from their own funds.
  • Credit scores also play a vital role in easy loan approval.
  • Mismatch in the data provided will lead to the non-approval of the loan application.
  • GST registered firms can apply through the GST portal as such firms will get an extra 2% interest subvention on the loan availed.

Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE)

What is a credit guarantee? Credit guarantee basically refers to a situation where the loan to an applicant is backed by a party without the need of any external third party or collateral agreement. In credit guarantee fund schemes, loan to an applicant is backed by the scheme which covers guarantee for a large portion of the loan amount. Under this scheme, both new and existing micro and small enterprises are eligible for a maximum credit cap of Rs. 2 crores. The main objective behind this scheme is:

  1. To check the financial viability of the project of such companies.
  2. To provide term loans and composite credit schemes.

The scheme also encourages women entrepreneurs and enterprises based in the north-eastern states including Sikkim and Jammu and Kashmir.

Now, let us talk about the requirements for eligibility and the procedure to apply for the scheme. 

Eligibility for the CGTMSE scheme

Lending borrowers

All existing and new Micro and Small Enterprises engaged in: 

(i) manufacturing activity, 

(ii) service activity except those in the retail trade, educational institutions, self-help groups, training institutions.   

Lending institutions

Lending institutions that provide funding support to specific sectors are in agreement with CGTMSE. These include:

  1. Scheduled commercial banks (SCBs).
  2. Non-Banking Financial Companies (NBFCs).
  3. Small Financial Banks (SBFs).
  4. Regional Rural Banks (RRBs).
  5. North Eastern Development Finance Corporation Ltd.
  6. Small Industrial Development Bank of India (SIDBI).
  7. National Small Industries Corporation (NSIC).

Fees charged by the CGTMSE

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is dedicated to achieving the goal of the scheme. The trust charges a fee of 1% p.a. of the amount sanctioned.

  1. 0.75% for credit of up to Rs. 5 lakhs.
  2. 0.85% for credit above Rs.5 lakhs but up to 1 crore.

Extent of cover

The extent of cover is up to 80% for:

  • Micro and small enterprises operated and owned by women entrepreneurs.
  • All credits and loans are given to north-eastern states including the state of Sikkim.

Procedure to get the loan under CGTMSE scheme

Having a business entity

The borrower should incorporate a private limited, limited liability partnership, one person company, or sole proprietorship accordingly. Necessary approvals and tax registration should be ensured beforehand.

A business plan

Borrowers also need to conduct a market analysis and prepare a business model, promoter profile, projected financials, etc. this report is important as it is presented before the credit facility and then an application is filed for the loan. It is advisable to get this report prepared by a professional as it increases the chances of loan approval.

Loan sanction

After carefully analysing the viability of the business model and the other information provided the bank sanctions the loan according to its policies.

Guarantee cover

After the bank sanctions the loan, it applies to the CGTMSE authorities to obtain the guarantee cover. If the CGTMSE approves the loan, the borrower needs to pay the guarantee fee and the service charges.

Relevant documents required

  • Passport size photographs,
  • Business incorporation letter,
  • Company registration certificate,
  • Business plan report,
  • CGTMSE loan application form,
  • Copy of loan approval from the bank, and
  • CGTMSE loan coverage letter.

Claim settlement procedure

After the final part of the loan is disbursed, a lock-in period of 18 months exists to prefer the claim. Once the defaulted account is declared as NPA, the bank or the lender initiates the claim procedure. The whole procedure is known as the CGTMSE claim settlement procedure.

Awareness of schemes

Though the government has been trying to provide financial assistance and support to the Micro, Small, and Medium Enterprises (MSMEs), the awareness related to the same has been lacking ever since. Initiatives of various state governments to spread awareness regarding the loan schemes and other financial aid assistance programmes are still not turning out to be fruitful. Prime Minister Employment Generation Programme (PMEGP)  which is one of the flagship schemes of the Indian Government is aimed at generating self-employment opportunities by establishing micro enterprises but the awareness of the scheme is still an issue. NITI Aayog identified around 117 aspirational districts to spread awareness about the existing schemes of the MSME ministry and to encourage people to set up enterprises to boost the MSME sector. Steps like this are welcome but they are not enough. As the MSME sector has the potential to boost the economy and also generate employment, it is important to spread awareness related to the government schemes which tend to provide adequate benefits to the growing startups. 

Schemes covered under MSME loan

MSMEs require credit facilities to start or expand the business process. To facilitate the smooth working of this sector, the government provides various loan schemes through public sector banks or even through financial institutions. Some of the most popular schemes under the initiative to provide loans to the MSME sector includes:

Both the existing and new enterprises are eligible to apply for this scheme. Credit facilities of up to 200 lakhs can be procured through this scheme.

This aims at providing technology upgradation to the MSMEs. This scheme provides a 15% subsidy for additional investment up to Rs.1 crore for technology upgradation. 

Micro Units Development and Refinance Agency Ltd. (MUDRA) is an NBFC that provides support to the MSMEs. A loan requirement of up to 10 lakhs is facilitated for the micro units.

Every individual above the age of 18 years is eligible for this scheme. The maximum cost for the project is 25 lakhs for the manufacturing sector and 10 lakhs for the service sector, for assistance under this scheme.

New enterprises in the manufacturing and services sector are covered under this scheme. Existing enterprises looking for expansion are also eligible under the scheme. The minimum loan size is 10 lakhs for equipment and other and 25 lakhs for other assistance.

The business loan in-principle amount is from Rs.1 lakhs to Rs.5 crores. New and existing both enterprises are eligible for the loan.

Conclusion

The MSME sector is playing a vital role in the Indian economy. This sector works for the development of the workers and artisans alongside creating employment opportunities. MSMEs produce and manufacture varieties of goods for the domestic as well as the international markets resulting in an increase in exports. MSMEs help in promoting the growth of the khadi and coir industries. To provide support to this highly dynamic sector, the central government and the state governments are introducing various schemes to infuse capital. Sector-specific loan schemes and other credit facilities have been provided. The government should come up with engaging programmes to increase awareness regarding the schemes so that the MSMEs continue to grow.

References


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