Mutual Credit Guarantee Scheme for MSMEs Launched

The Government of India has introduced the Mutual Credit Guarantee Scheme for Micro, Small and Medium Enterprises (MCGS-MSME) to enhance credit availability for MSMEs. This initiative aims to provide a 60% guarantee coverage for loans up to ₹100 crore, facilitating the purchase of essential machinery and equipment. The scheme is step towards boosting the manufacturing sector and aligns with the Prime Minister’s vision of ‘Make in India, Make for the World’.

Scheme Overview

• The MCGS-MSME is designed to support MSMEs in acquiring equipment and machinery.
• It offers a guarantee of up to ₹100 crore for eligible borrowers with valid Udyam Registration.
• The scheme allows for project costs exceeding ₹100 crore, with a minimum of 75% of the project cost allocated for equipment.
• Loans up to ₹50 crore can have a repayment period of up to eight years, including a two-year moratorium on principal repayments.

Financial Structure

• An upfront contribution of 5% of the loan amount is required at the application stage.
• The annual guarantee fee is waived for the first year.
• For the subsequent three years, it will be 1.5% per annum based on the outstanding loan amount as of March 31.
• After this period, the fee decreases to 1% per annum.
• The scheme is valid for four years from the operational guidelines’ issuance or until a cumulative guarantee of ₹7 lakh crore is reached.

Impact on Manufacturing Sector

• Manufacturing contributes to India’s GDP and employment.
• The scheme is expected to increase the manufacturing sector’s share from 17% to 25% of GDP.
• By facilitating access to credit, MSMEs can expand their operations and invest in modern machinery, thereby enhancing productivity and competitiveness.

Global Context

As global supply chains undergo realignment, India is positioned as a viable alternative for manufacturing. The country offers a rich resource base, competitive labour costs, and an increasing manufacturing skill set. The MCGS-MSME addresses the critical need for credit in the medium enterprise category, promoting growth and investment in the manufacturing sector.

Eligibility and Participation

To participate in the scheme, borrowers must be MSMEs registered under Udyam. Member Lending Institutions (MLIs) include all Scheduled Commercial Banks, Non-Banking Financial Companies, and All India Financial Institutions that register with the National Credit Guarantee Trustee Company Limited (NCGTC). This broad participation aims to ensure that a wide range of MSMEs can access the benefits of the scheme.

Future Prospects

The MCGS-MSME is expected to create a robust framework for MSMEs, enabling them to secure collateral-free loans. This initiative will likely lead to increased investment in manufacturing, encouraging innovation and growth in the sector. As MSMEs thrive, the overall economy stands to benefit .

Questions for UPSC:

1. Examine the potential impact of the Mutual Credit Guarantee Scheme for MSMEs on India’s manufacturing sector.
2. Critically discuss the role of MSMEs in the Indian economy and their contribution to employment generation.
3. Analyse the significance of collateral-free loans for MSMEs in the context of global economic trends.
4. Point out the challenges faced by MSMEs in accessing credit and how the MCGS-MSME addresses these issues.

Answer Hints:

1. Examine the potential impact of the Mutual Credit Guarantee Scheme for MSMEs on India’s manufacturing sector.

1. The scheme provides 60% guarantee coverage for loans up to ₹100 crore, enhancing credit availability for MSMEs.
2. It is expected to increase the manufacturing sector’s contribution to GDP from 17% to 25%.
3. Facilitates access to modern machinery and equipment, boosting productivity and competitiveness.
4. Encourages investment in manufacturing, aligning with the ‘Make in India, Make for the World’ initiative.
5. Promotes growth in the medium enterprise category, addressing the critical need for credit in this segment.

2. Critically discuss the role of MSMEs in the Indian economy and their contribution to employment generation.

1. MSMEs contribute to India’s GDP, accounting for approximately 29% of the total output.
2. They provide employment to over 27.3 million workers, making them vital for job creation.
3. MSMEs encourage entrepreneurship and innovation, driving economic growth and diversification.
4. They play important role in exports, contributing around 48% of total exports from India.
5. Support local economies by creating a network of suppliers and service providers, enhancing regional development.

3. Analyse the significance of collateral-free loans for MSMEs in the context of global economic trends.

1. Collateral-free loans reduce the financial burden on MSMEs, enhancing their access to credit for expansion.
2. In a global economy, MSMEs need flexibility to adapt quickly to market changes and consumer demands.
3. These loans promote innovation by enabling MSMEs to invest in new technology and processes without asset risk.
4. Facilitates participation in global supply chains by allowing MSMEs to scale operations efficiently.
5. Aligns with global trends towards inclusive financing, encouraging sustainable economic growth.

4. Point out the challenges faced by MSMEs in accessing credit and how the MCGS-MSME addresses these issues.

1. MSMEs often face stringent collateral requirements, limiting their access to necessary funding.
2. Lack of credit history and financial literacy among MSME owners can hinder loan approvals.
3. The MCGS-MSME offers a 60% guarantee, reducing lender risk and encouraging credit disbursement.
4. By waiving the annual guarantee fee for the first year, it lowers the initial cost of borrowing for MSMEs.
5. Encourages Member Lending Institutions to provide loans without collateral, addressing a major barrier to credit access.