Everything You Need to Know About MSME Loan Subsidy

Micro, small, and medium (MSME) enterprises serve as small cogs in a large industrial machine ( the economy), ensuring the smooth functioning of significant industries by providing components, raw materials, and services. MSMEs require adequate and timely finance, competitive markets, and a smooth registration process to grow and progress. 

The government of India has taken many steps and launched several loan schemes, in addition to financial institutions and banks, to credit MSMEs for their progress. From collateral-free loans and accessible credit facilities to tax, better interest rates, and MSME loan subsidies, the offerings are many for MSMEs. In this blog, we shall list various MSME loan subsidies so you can choose the one that suits your business best.

What is an MSME loan subsidy?

Several financial institutions offer unsecured loans at low interest rates to micro, small, and medium enterprises (MSMEs) to help entrepreneurs meet business-related expenses. The MSME loan subsidy scheme loans are for certain businesses, as per the Indian Government and RBI. During the scheme's active period, eligible MSMEs can receive interest relief of two percent per annum on their outstanding fresh/incremental term loans.

What role does an MSME loan subsidy play?

MSME loan subsidies help reduce the financial burden by offering direct and indirect financial benefits, which allows MSMEs to sustain, grow, and compete. Here is a little detailed explanation:

1. Lower Interest Rates: Lower interest rates of MSME subsidies reduce borrowing costs and free funds for business growth and operations.
2. Reduced Capital Investment Costs: By subsidizing a portion of the cost, MSMEs can utilize modern equipment and processes without strainingthe company for upfront payments.
3. Increased Access to Credit: The MSME subsidies sometimes come with lower collateral requirements or credit guarantees, enabling MSMEs with limited resources to secure loans.
4. Support for Operational Costs: Some MSME subsidy loan schemes have operational expenses such as electricity bills, rent, or training programs. This frees up resources that MSMEs can redirect to revenue-generating activities like marketing or product development.
5. Encouraging Exports with Incentives: MSME subsidy loan schemes help export-focused MSMEs get tax rebates, financial assistance for collaboration with international trade fairs, or freight cost reimbursements, which helps them compete in global markets without financial pressure.
6. Cushion Against Market Volatility: MSME loan subsidies help MSMEs face economic shocks like downturns or inflationary pressure. The subsidies ensure the MSMEs' liquidity and survival during challenging market volatility times.
7. Enhancing Profit Margins: MSME loan interest rate subsidies help improve the profit margins of MSMEs by reducing costs related to loans, technology upgrades, and operations.
8. Promoting Inclusivity: MSME loan interest rate subsidies sometimes prioritize businesses conducted by marginalized groups, like women entrepreneurs in rural areas. Subsidies thus empower underserved sections of society to contribute to economic growth.

What are the government schemes offering MSME loan subsidies?

Most of India's public sector and private banks offer MSME loans under several government offers. Some of the popular ones are:

• Mudra Loans: An NBFC, it offers credit facilities to small businesses 
• Credit Guarantee Trust Fund (CGTMSE): The government issues these collateral-free loans to micro and small MSMEs 
• Prime Minister's Employment Generation Programme (PMEGP): This program helps create employment opportunities through micro-enterprises in the non-farm sector in rural and urban areas.
• Interest Subvention Scheme: This government scheme aims to augment the growth and financial stability of Micro, Small, and Medium Enterprises (MSMEs) in India. It reduces the cost of credit for eligible MSMEs by providing an interest relief of 2% per annum on fresh or incremental term loans and working capital loans. It also formalizes GST compliance. 

What are the eligibility criteria for MSMEs to obtain subsidy loans?

The eligibility for obtaining MSME subsidy loans is discussed here:

• The enterprise must be a registered MSME under the Udyam Registration portal, 
• Register your business under relevant tax laws like GST.
• The MSME should operate for at least a certain period (e.g., 1 year).
• The applicant must ensure a financial record with no significant defaults in past loans.
• The MSME must have a satisfactory credit history and demonstrate financial viability.
• Some schemes may require the enterprise to be a first-time borrower or apply through banks or recognized financial institutions.
• A detailed project report outlining the business's goals, financial estimates, and plans for using the loan is required. 
• To qualify for loans, MSMEs must comply with government policies regarding environmental standards, labor laws, and other regulations.

How to apply for MSME Subsidy Loans?

The MSME loan application process is simple but needs a bit of careful planning. Let us go through these points to understand how to apply for MSME loan subsidy: 

1. Decide loan needs: Assess your business's financial requirements and decide on the loan amount and the category( machinery, equipment, working capital) for which you need the money.
2. Check eligibility: Review the eligibility details in the blog above to ensure your eligibility meets the lender's criteria.
3. Prepare documentation: Collate all the required documents, including business proofs(business plan, financial statements, profit and loss accounts, Udyam registration, GST registration, etc.).
4. Research lenders: Compare different tenders, such as banks, NBFCs, and governmental MSME subsidy schemes. Check the interest rates, loan terms, and lender reputation before approaching the one that suits your requirements.
5. Apply: After you have selected a lender, complete the loan application online or offline. Attach your documents to the loan application and submit it.
6. Loan approval: The lender will review your application. If all the criteria are met, the MSME subsidy loan will be approved and disbursed to your account.

What are the benefits of MSME loan subsidy?

An MSME subsidy loan has many benefits, including:

• Access to affordable financing with lower interest rates.
• It reduces the overall financial burden on MSMEs.
• Motivates infrastructure and development of business expansion 
• MSME loan subsidy schemes facilitate the integration of advanced technology and modernization.
• MSME loan subsidy promotes entrepreneurship, especially among marginalized groups.
• MSME subsidy loan boosts resilience in domestic and global markets.
• The benefits of MSME subsidy loans support job creation and regional economic development.
• The MSME subsidy loan improves the financial stability and creditworthiness of MSMEs.
• MSME loan subsidy offers protection during economic challenges or downturns.
• The benefits of the MSME loan subsidy encourage sustainable and innovative business practices.

What are the challenges of MSME loan subsidy?

Micro, small, and medium enterprises (MSMEs) encounter several challenges when applying for loans, including:

• Banks and financial institutions often require loan collateral, but MSMEs may not have assets to commit. 
• MSMEs may need a credit history, making securing loans difficult. 
• Many MSME owners come from regions with poverty and limited education, which can lead to financial challenges. 
• MSMEs may face high interest rates. 
• The documentation process for MSME loans can be complicated.
• MSMEs may face regulatory issues when applying for loans. 
• MSMEs often face severe qualifying criteria set by financial companies. 
• MSMEs may need more awareness of government schemes, leading to financial crises.
• An MSME may face marketing challenges such as poor product quality, lack of market knowledge, and competition. 
• MSMEs may need help investing in infrastructure development or building facilities, which may take too long.

Conclusion

MSME loans enable small businesses to maximize their growth by providing financial stability, encouraging modernization, and promoting growth. They drive economic development and entrepreneurship in the country. When selecting the appropriate loan subsidy for your specific requirement, whether it is expanding operations, upgrading technology, etc., be sure to meet the eligibility criteria and apply with a robust plan. With the right MSME subsidy loan, you can take your business to the next level and elevate the country's economy. 

FAQs

Q1. What is the subsidy for an MSME loan?

Ans. Under this MSME loan subsidy scheme, eligible firms can receive interest relief of two percent per annum on their outstanding fresh/incremental term loans or working capital loans during the scheme's active period.

Q2. What is the interest rate of an MSME subsidy loan?

Ans. The interest rates on MSME loans begin at 8.85% p.a.The loan amount sanctioned ranges from Rs. 50,000 to a few crores. Based on the sanctioned loan amount, the loan repayment duration can go up to 15 years.

Q3. What is the percentage of subsidy in an MSME loan?

• For General Category: 15% of the project cost in urban areas
• For General Category: 25% of the project cost in rural areas
• Subsidy for Special Category(SC/ST/OBC/ Minorities/Women/ NER/Hill Areas): 25% in urban, 35% in rural areas. 
• Contribution of the Entrepreneur: General: 10 %, Special category: 5 %.

Q4. What is the rejection rate of MSME subsidy loans?

Ans. According to some reputed Statistical agencies, India's MSME loan rejection rate is currently 28%, which is very high compared to other rapidly growing economies (5%). According to World Bank data, only 15% of MSMEs in India have bank loans.