GST Advisory

MSME Loan – Check Features, Eligibility and Interest Rates 2023

MSMEs generate more than 33% of India’s GDP. Thus, MSMEs are a crucial component of the Indian economy. The number of jobs produced by MSMEs, which were more than 120 million, is equally remarkable. As such a crucial component of the economy, it is crucial to establish and implement laws and regulations that would allow MSME businesses to operate efficiently. Since its creation, the MSME sector has established itself as a very dynamic sector of the Indian economy. MSMEs create and produce a wide range of goods for both domestic and foreign markets. They have supported expanding and developing the coir, khadi, and village industries. In order to improve rural areas, they have engaged and worked with the relevant departments, state governments, and stakeholders.

Rural communities now have more employment options due to a large part to MSMEs. In comparison to the major industries, they have contributed to the industrialization of these areas at an affordable capital cost. The MSME sector, which functions as an addition to large sectors, has made a significant contribution to its socioeconomic growth.

Important Details for MSME Loans 2023

Interest Rate	8.75% per annum onwards
Loan Amount	Minimum Limit – None  Maximum Limit  –  up to Rs. 2 crores, which can exceed as per business requirements
Repayment Tenure	From 1 year to 5 year
Collateral/Security	Not required
Processing Fee	Up to three per cent of the loan amount sanctioned
Foreclosure Charges	From Nil to 5% of the principal amount that is outstanding
Subsidy	Provided by only a few selected financial institutions
Credit Facilities	Bill discounting, Overdraft, Working Capital Loan, Term Loan, Bill of Purchase, Merchant Cash Advance, Cash Credit, Letter of Credit, Loans under Govt. Schemes, etc.

What is MSME?

In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act of 2006, the Government of India has established MSME, or Micro, Small and Medium Enterprises. Production, manufacture, and preservation of processing of commodities and goods was the primary objective of such enterprises. MSMEs play a significant role in the Indian market and have significantly contributed to the country’s socioeconomic progress as a whole. Along with creating avenues for employment, it also contributes to the advancement of the nation’s rural and underdeveloped regions.

New Definition of MSME

The definition of MSME was amended by the Indian government in the year 2020, on 13^th May. The new definition of MSME is:

• The previous classification of MSME from investment has now been changed into Investment and Annual Turnover.
• The Indian government has increased the MSME unit’s classification investment limit. More businesses and enterprises can now be eligible for availing schemes of MSME.

What is an MSME loan?

You can apply for MSME Loans, frequently referred to as Micro, Small, and Medium Enterprise Loans, if you run a business or are an entrepreneur. This kind of loan gives you access to working capital that you can utilize for a wide range of purposes, including replenishing your inventory, investing in new machinery, paying your employees’ salaries, or assisting in the growth of your business. In India, there are numerous lenders who provide MSME loans to their clients. Additionally, the interest rates vary considerably from bank to bank.

For a new business, an MSME loan is the best option for managing the MSME and enhancing its financial situation by assisting with the purchase of cutting-edge equipment, machinery, inventory, paying employees their wages, etc. It can also aid in the expansion and growth of MSMEs. Applying for and receiving approval for MSME loans is possible for new business owners, small business owners, home-based business owners, and women owners of businesses.

The business owners must meet some minimal qualifying standards because these loans are unsecured. As a result, there is reduced risk for the lending institution or financial institution in the event of failure to pay or default. For loans to MSME businesses, many banking institutions offer distinct rates. These business loans typically feature flexible terms and cheap interest rates. This will make it easier for small business owners to meet their financial obligations without feeling burdened by the loan. However, the interest rate and term vary depending on the bank.

Who is eligible for MSME loans?

An MSME loan is not a loan that is open to everyone because it is only offered to owners of businesses who own an enterprise as defined by the MSMED Act. Your company must fulfil the eligibility requirements to qualify for an MSME loan. The candidate must have a credit score of at least 750. The business must have been in operation for more than a year. The applicant’s age must fall between 18 and 65. The applicant’s name cannot be listed in a loan defaulter’s record. The company must have filed ITRS for at least one year. Additional common requirements for MSME loan qualifying include:

Particulars	Criteria
Business Type	Manufacturing Sector Service Sector
Investment in the business  –  Manufacturing Sector	Micro – less than Rs.25 lakh Small – less than Rs.5 crore Medium – less than Rs.10 crore
Investment in the business  – Service Sector	Micro – less than Rs.10 lakh Small – less than Rs.2 crore Medium – less than Rs.5 crore

Features of MSME loan

The following are the characteristics of an MSME loan:

• It aids small enterprises in enhancing their operations.
• Collateral is not needed in order to obtain an MSME loan.
• An MSME loan offers convenient, flexible repayment schedules for the loan balance.
• In a matter of days, the MSME loan will be authorized, and the funds will be electronically credited to the MSME account.
• The interest rate for MSME loans is extremely inexpensive and starts at 8.75% p.a.
• Quick payment and the accessibility of MSME loans assist in avoiding delays in company activities.
• The additional charges for MSME loans, such as processing fees, are quite low. There are no further unstated fees.
• MSME loans promote the development of infrastructure, the modernization of businesses nationwide, especially in Tier-2 and Tier-3 cities and towns, and the promotion of progressive technologies.

Interest rates for MSME loans of Banks

Top banks

Bank Name	Interest Rate
Indian Bank	8.75% p.a. onwards
Central Bank of India	As per the bank
State Bank of India	8.25% p.a. onwards
Canara Bank	As per the bank
UCO Bank	8.70% p.a. onwards
Union Bank of India	As per the bank
Punjab and Sind Bank	9.05% p.a. onwards
Punjab National Bank	9.60% p.a. onwards

NBFCs

Interest Rate	NBFC
15% to 17% per annum	Lendingkart
As per the lender	Muthoot Fincorp
As per the lender	Mahindra Finance
17% to 21% per annum	Fullerton India

Who Can Apply for MSME Loans?

• Individuals
• MSME owners
• Sole Proprietorships
• Partnerships
• Women entrepreneurs
• Self-employed individuals
• People under the SC/ST/OBC category¹
• Private or Public Limited Companies
• Limited Liability Partnerships (LLPs)

What is the objective of getting an MSME loan?

The following are the objectives for which MSME loans can be taken:

• Either launching a new business or growing an existing one
• Purchase machinery and plants, such as furnishings, electrical appliances, testing, or lab equipment.
• Purchasing machinery or cars
• Purchase of property or premises or building construction
• Launch of new commercial goods
• Fulfil the needs for operating capital, such as purchasing items and raw materials, paying workers, and stocking up on inventories
• Purposes of marketing and advertising

How to apply for a MSME loan

To submit an application for an MSME loan; there are two ways:

• Online application
• Visiting the Bank

If the lender has an online application, you can fill out the form with all the required necessary documents and then submit it online. The other way is to visit the bank branch, ask for the application form, and ask the bank itself what documents are required.

For online application, follow the below-mentioned steps:

1. Visit the bank or the lender’s website
2. Choice of the MSME Loan Scheme
3. Click on the ‘Apply’ button
4. After this, the application form is to be filled out and submitted.
5. The bank’s or the lender’s representative will verify the loan scheme, which is sleeted.
6. The essential documents are to be submitted.
7. The request for loan and document verification will take place.
8. The lender will send the agreement.
9. The amount of the loan will be credited to the bank account within forty-eight hours of the signing.

Essential documents which are required for MSME loan

• Aadhar card
• PAN card
• Passport
• Voter’s ID,
• Driving license
• Utility bills.
• Proof of address for the business, such as lease agreement, sale deed, rent agreement, or utility bills.
• Bank statement for the past six months
• Certificate of incorporation
• Balance of last 2 years
• Profit and Loss statement for last two years
• Income tax returns of  business
• Other documents as required by NBFC or the bank.

Government-initiated schemes for MSME loans

• Stand Up India Initiative: The Stand Up India Scheme supports MSMEs in India’s underdeveloped regions. According to the goals of the loan, a minimum of one SC/ST and one woman borrower will be able to borrow a specific amount to start their greenfield initiatives. The sanctionable credit provided by the Small Industries Development Bank of India (SIDBI) is restricted to amounts between 10 lakhs and 1 crore.
• SMILE Plan: Another initiative the authorities undertake to give small and micro businesses essential financial support is the SMILE scheme, known as the SIDBI Make in India Soft Loan Fund for MSMEs. Existing businesses can receive a minimum of Rs. 25 lakh in loans, while new businesses can receive up to Rs. 50 lakh. A debt-to-equity ratio balance can be maintained because an MSME loan under this scheme has very relaxed terms.
• Udyogini Plan: The Women Development Corporations sponsor the initiative, which has won widespread appreciation for assisting the country’s businesswomen. Suppose a small or micro business run by a woman entrepreneur is located in a rural or underdeveloped area. In that case, it can be qualified to receive a discounted MSME loan under this initiative. The maximum loan amount available to applicants is Rs. 3 lakh.
• The Pradhan Mantri MUDRA Yojana: The government has introduced this program with non-farming and non-corporate businesses in mind. Therefore, businesses in the manufacturing, service, and service sectors can each get up to Rs. 10 lakh as an unsecured loan for MSMEs from various financier intermediaries.
• NSIC – National Small Industries Corporation Scheme: A dual loan and marketing support initiative under NSIC gives small firms the competitive edge they need to compete in a transparent and free market. Credit for individual MSME units is available up to Rs. 5 crore, with interest rates ranging from 9.5% to 12%.
• Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGTMSE): Small firms frequently don’t have the necessary assets to use as security when applying for credit. As a result, they are frequently classified as high-risk borrowers, which might result in their loan application being denied. The Government of India has introduced this business credit for the MSME sector to remove these barriers for these companies. According to this regulation, new and existing firms may borrow up to Rs. 200 lakh from a few of the country’s financing institutions without putting up any collateral.
• PMEGP, or the Prime Minister’s Employment Generation Program: This Indian government plan is a credit-linked grant scheme that has seen a lot of success. In other words, under this scheme, the government authorities can offer financial assistance to a corporation for a sizeable amount of the project costs. Under this plan, credits ranging from Rs. 5 lakh to Rs. 25 lakh are accessible. This program’s main objective is to create new employment opportunities in rural areas by transforming small business owners into significant employers. This scheme has highlighted micro businesses.
• 59-minute MSME business loans: A qualifying MSME can obtain a credit amount under this program that ranges from one lakh to five crores. This MSME loan, which is available from both conventional institutional lenders and NBFCs, has an annual interest rate of 8.50%.
• GEMs, or Growth Capital and Equity Assistance Scheme: This way of raising money functions as a mezzanine debt instrument, which is beneficial for India’s MSME sector. This plan might be a great solution for a business looking for financial resources for future expansion or modernization of its mechanism procedures. Depending on the need, the loan amount varies, but it is typically at least Rs. 25 lakh. Surprisingly, this financial increase can also be beneficial for investment initiatives that don’t involve the creation of assets, like one-time expenses needed for marketing or R&D.

What factors affect the interest rates of MSME loans?

Some of the features that affect the interest rates of MSME loans are:

1. Amount of loan: The quantity of financing an MSME needs to operate significantly impacts the interest rate that the bank or other financial institution charges. The interest will increase in proportion to the amount and vice versa.
2. Annual business turnover: The lender is going to be wary of extending loans to a borrower without strong financial standing. Therefore, a business with good financial health will be a strong choice for a loan as it may be certain that the borrower will make payments on time. Successful businesses may also be eligible for reduced interest rates due to the lesser risk involved with financing.
3. Business Nature: Each business has its own business model. Some could be production-oriented, while others might be service-oriented. Certain businesses also carry a greater risk due to a number of factors. As a result, depending on how the lender views the risk involved with the firm, the interest rates paid on the loan for a business may change.
4. Credit rating of the business: A company’s creditworthiness, as shown by its credit score or credit rating, is one of the key factors affecting the interest rate on an MSME business loan. Financing is risky for any lender, and one of the only ways to ensure that they are financing a reliable firm is to look up its business credit score. If the firm is tiny or has no credit history, the promoter’s or founder’s personal credit score is taken into account. The borrower will have a major advantage in receiving loans with cheap interest rates if they have a good credit score.

Categorization for MSME

Classification	Micro	Small	Medium
Manufacturing and Services Enterprises	Investment not exceeding Rs.1 croreTurnover not exceeding Rs.5 crore	Investment not exceeding Rs.10 croreTurnover not exceeding Rs.50 crore	Investment not exceeding Rs.50 croreTurnover not exceeding Rs.250 crore

Guidelines of RBI for MSME loans

The Reserve Bank of India Guidelines for MSME Loans is as follows:

• The RBI has deregulated all bank credit-related activities, including interest charging, and these activities are now governed by a bank’s lending guidelines.
• If a unit in the MSME sector is given a loan of up to Rs. 10 lakh, no collateral security is needed.
• If the maximum aggregate exposure to one party does not reach the threshold level of Rs. 7.5 Cr, external credit rating agencies are not required.

Conclusion

When the business owner wants to apply for the MSME loan, they can apply online and offline. These loans can be provided by banks as well as other financial institutions or NBFCs. The government has laid down many different types of schemes for MSMEs. The MSME business owner can apply for the MSME loan to start up a business or even grow the business, buy some machines, plant or any other equipment to launch some new products or services, etc.

Frequently Asked Questions

1. https://socialjustice.gov.in/common/76750