Interest subvention scheme for MSME – Co-operative banks

Interest subvention scheme

In the year 2018, to give a boost to the Small and Medium Enterprise (MSMEs), the Indian government has announced the ‘Interest Subvention Scheme for MSMEs 2018’ on 2nd November 2018 for only the scheduled Commercial banks. The Reserve bank of India by its new notification on 7th October 2020 has decided to include Cooperative Banks too, which now will also be eligible as a lending institution. This scheme enables to provide an interest relief of two percent per annum to all the legal MSMEs on their incremental term /outstanding fresh loan/ working capital in the time period of its validity. However, the scope of the scheme is confined to working capital/term loan to the extent of one hundred lakh. The amount of the loan on the day of filing the claim must not have been acknowledged as NPA as per the guidelines in force. There should be no interest subvention that must be admissible for the time period where the accounts still remain NPA.

Background of Interest Subvention Scheme for MSMEs

The Micro, Small and Medium Enterprises (MSME) have been a huge contributor to building the stable and a strong national economy. The prime minister of India has initiated an outreach mission for the MSME sector in India; it highlights the ease of doing business, access to market, access to credit and technology upgrade and also a sense of security for the employees are five crucial aspects for supporting MSME sector. As to the part of access to credit, the Prime minister proclaimed 2% interest subvention for all MSME registered under GST, on incremental or fresh loans.

Purpose, Scope and duration of Interest Subvention Scheme for MSMEs

The motive of this scheme is to encourage both the service enterprise as well as to escalate productivity and further provide an incentive to MSMEs for on boarding the platform of GST which helps to the formalization of the economy, further reducing the cost of credit. This scheme will be in action for the period of two financial years FY 2019 and FY 2020.


Coverage of Interest Subvention Scheme for MSMEs

All the MSMEs who will meet the criteria shall be eligible as beneficiaries under the scheme:

  • Valid GST Number
  • Valid Aadhaar Number
  • All the fresh term loans or incremental term loans or fresh or incremental term loan during the current financial year would be eligible for the coverage.
  • The working capital or the term working loans should have been extended by scheduled Commercial Banks

Operational formalities under Interest Subvention Scheme for MSMEs

  1. The relief on interest will be calculated at two percentage points P.A, on the outstanding balance from time to time from the date of drawl /disbursal or the day of the notification of the scheme, whichever is afterward, on the fresh or incremental amount of working capital which is sanctioned.
  2. The interest rates which are charged to the MSMEs must conform to the code of ethics and the code of fair practice with the respective institution as per the RBI guidelines and further linked it with the external and internal rating of the MSME.
  3. The loan accounts on the date of filing the claim must not have been declared as Non-Performing Assets (NPA) as per the RBI guidelines in force. There must be no interest subvention for any period during which the account remains non-performing assets.

Claim Submission under Interest Subvention Scheme for MSMEs

  1. The Nodal office of the entitled lending institution shall submit their half yearly claim to SIDBI in the prescribed format. All information related to the interest relief claimed and the loans disbursed must be submitted in the soft copy in excel.
  2. The format relating to the compilation of data by the branches of the valid institutions. In the same way, it shall be submitted by the branches to their head offices.
  3. All the claims which are made should be duly certified by the statutory auditors of the eligible institutions. The certificates must include statements on verification of the person’s account with respect to the fresh lending/ incremental, amount, the interest charged and the amount which is claimed.
  4. The half yearly claim must be submitted to the SIDBI, Chief General Manager, Institutional Finance Vertical and Mumbai.
  5. The Dismemberment against every claim to the individual institution must be only after the release of funds from MOMSME.
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Other covenants Interest subvention scheme for MSME

  • SIDBI must work as nodal authority for the intention of channelizing of the Interest subvention to a range of lending institutions.
  • All the institution involves in lending must be responsible for the submission of the precise data and the monitoring of the scheme.
  • The interest subvention would be discharged on the basis of a claim properly certified by the Statutory Auditors of the eligible institutions.

RBI’s latest notification regarding Interest Subvention Scheme for MSMEs

The Reserve bank of India by its new notification on 7th October 2020 has decided to include Cooperative Banks too, which now will also be eligible as a lending institution.

The following guidelines for this scheme have been further modified by the government as under:

  • The legitimacy of the scheme has been further extended till March 31, 2021. Accordingly, the incremental and the fresh term loan/working capital limit extended by the cooperative banks with valid from March 3, 2020 will be eligible to be enclosed under the scheme.
  • The claims receipt in the multiple lots for a given half-yearly by the eligible is allowed.
  • The requirement of the Aadhaar Number may be given out  with the particular units which are eligible for GST. There are certain units which are not required to receive GST may either submit the Income Tax permanent account number shall be sorted as MSME by the concerned bank.
  • The trading actions have also been permissible to be covered under the scheme without UAN.

The Small Industry Development Bank of India[1] (SIDBI) is a national nodal authority to implement this scheme. Also, the Co-operative banks must take suitable actions as envisaged in the above mentioned operational guidelines and the necessary instruction to their controlling offices for victorious implementation of the scheme.

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In order to provide aid and relief to the pandemic hit MSME Sector, the RBI has provided an extension of the two percent Interest subvention scheme offered on the loans provided by the interest subvention scheme. The step is been initiated to further boost the MSME sector and making Co-operative Banks aa eligible lending Institutions 

Read our article:Data Analytics for Non-Performing Assets (NPA)

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