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2019-06-24 21:48:15Starting a Business: Funding and FinancingEnglishIt is challenging for small businesses to get financial assistance. Hence, government loan schemes for small business are rolled out to... Government Loan Schemes for Small Businesses in India

4 Government Loan Schemes for Small Businesses in India

15 min read

Micro, small and medium enterprises (MSMEs) are the backbone of the socio – economic development of India. These enterprises contribute significantly to expand the entrepreneurial activity in India via innovation.

Thus, the sector is widening its domain for fulfilling both the domestic as well as global demand.

Furthermore, MSMEs are a key contributor to India’s economic growth. This is because of their contribution to GDP and employment generation within the country.

The share of MSMEs in India GDP in 2015 – 2016 was 28.77% . In fact, it’s contribution to the GDP of India in the five years is close to 30% starting 2011 – 2012 and ending 2015 – 2016. (As per 2018 Annual Report of Ministry of MSME)

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Furthermore, the share of MSME sector in generating employment too suggests its crucial contribution to the economy’s growth. Thus, there are close to 51 million MSME units in India giving employment to 117 million people across various sectors. This makes for 40% of the total workforce.

However, the MSME sector gets the least share of the organized lending despite its significant contribution. Thus, only 5 million MSME units out 51 million have access to formal credit as per MSME Pulse report. (This report was published by Transunion CIBIL in collaboration with SIDBI in March 2018.)

This is because  it is challenging for small businesses to get financial assistance for growth. These small enterprises face stiff competition from the properly funded, established companies.

Hence, the government loan schemes for small business have been rolled out in order to give boost to the MSMEs.[/vc_column_text]

I. MSME Business Loans in 59 Minutes


The finance ministry launched a web portal to provide credit to the MSME units. This web portal provides credit to MSMEs under Public Sector Banks in just 59 minutes.

MSME loans upto Rs. 1 crore are approved from SIDBI and five Public Sector Banks at this online marketplace. Thus, the turnaround time for loan processing is reduced to just 59 minutes. And it takes 7 – 8 working days for the loan to get disbursed. However, the loan gets disbursed only after the receipt of the in principle approval letter.

Also, there is no intervention of humans until the loan gets sanctioned. Furthermore, the MSME borrower is not required to submit any physical document in order to get the approval. The web portal makes use of advanced algorithms to analyse data points from various sources such IT returns, GST data, bank statements etc.

The key features of this web platform include :


The key features of this web platform include :

  • SIDBI, SBI, Bank of Baroda, PNB, Vijaya and India Bank have a major stake under this scheme.
  • The web portal is first of its kind for MSME borrowers. This means, you can connect with multiple banks without visiting the branch.
  • This portal is an advanced digital platform for MSME financing. It incorporates services driven architecture and ensures highest level of information security.
  • It is the only platform in the market with a banker interface covering branch level integrations in tune with current system of PSBs.
  • This platform enables bankers to create customized loan products. These products are in line with scoring models and assessment methods as per the approved credit policy of the banks.
  • The web platform is integrated with the following technologies:
    • GST
    • ITR
    • Bank Statement
    • Fraud Check
    • Bureau Check
    • Other features
    • Such a facility is not available with any other player in the market.
  • This is the only platform that has been integrated with CGTMSE for checking the eligibility of the borrowers. MSME borrower get a loan of up to Rs. 2 crore without any collateral.

Eligibility Criteria

There is no specific criteria set by the government for availing this loan. So a small, medium and micro enterprise is allowed to apply for the instant loan under the scheme.

How to Apply?

  • You need to login on the official website to get the digitized enrollment document.
  • Then, complete the signup process.
  • Thereafter, you need to register on the portal using your name, personal email id and active mobile number.
  • Once these details are filled, click on the green button marked as get OTP.
  • The portal will send a unique code to your registered mobile number.
  • Then, click on the blue button marked as ‘proceed’ after typing the OTP.
  • Thereafter, click on the link marked as ‘need fund for new or existing business.
  • This will generate actual MSE enrollment form on the portal.
  • Now, fill the form following which you need to select the bank that will provide the requisite loan.
  • Once this is done, the approval will come promptly.
  • After the approval, link the enrollment link with your GST/IT accounts.
  • Furthermore, your bank statement details are necessary for prompt transfer of funds.
  • Therefore, this process is for those members who are new to the portal. In case you are already registered, you just need to enter your mobile number or email id to gain access to the portal.

II. Pradhan Mantri Mudra Loan Yojana (PMMY)


The Indian government established Micro Units Development and Refinance Agency Ltd (MUDRA) in the year 2015. This agency was established to support the micro enterprises. It was launched to support banks, microfinance institutions, NBFCs and other institutions lending to MSMEs.

Now, Micro entreprises include micro units engaged in manufacturing, processing, trading and services sector. These units constitute a major segment of the Indian economy. Furthermore, these units are single ownership enterprises providing employment to nearly 10 crore people in India.

Now, the formal lending institutions overlooked the MSME sector in terms of meeting its financial needs. Thus, most of these units are self financed or rely on traditional sources of finance such as money lenders.

Therefore, the Indian government established MUDRA to develop and refinance such micro enterprises. The aim of establishing this institution is to provide income generating opportunities to fund the unfunded.

Nature of Assistance

Offering under MUDRA comprise of the following categories:

  • Technology Enabler
  • Refinance for micro units to commercia banks/NBFCs/RRBs/Cooperative Banks/MFIs
    • Shishu – up to Rs. 50,000
    • Kishore – up to Rs. 50,000 – Rs. 5,00,000
    • Tarun – up to Rs. 10,00,000
  • Credit Guarantee to MUDRA Loans
  • Development and Promotional Support
    • Sectoral Development
    • Skill Development
    • Entrepreneurship Development
    • Financial Literacy
    • Institutional Development

There are three main stages of PM Mudra Bank Yojana. The following table showcases the same:

4 Government Loan Schemes for Small Businesses in India

Under MUDRA, there four types of funding support:

Micro Credit Scheme

This scheme is offered through Micro Finance Institutions. These institutions provide credit upto Rs. 1,00,000 for various micro enterprise activities. This support is given to individuals for specific income generating micro enterprise activity. And the mode of delivering such a support is through self help groups or joint liability groups.

Refinance Scheme for Banks

MUDRA gives refinance support to different banks for financing microfinance activities. These banks include commercial banks, regional rural banks and scheduled cooperative banks. This refinance is given for term loans and working capital loans upto a maximum limit of Rs. 10,00,000 per unit.

Women Enterprise Program

The banks or MFIs extend additional facilities including interest reduction on loan to encourage women entrepreneurs. Currently, MUDRA offers a reduction of 25 basis points in the interest rates to MFIs or NBFCs providing loans to women entrepreneurs.

Securitization of Loan Portfolios

MUDRA supports banks/NBFCs/MFIs to raise funds in order to finance small enterprises. This agency participates in the securitization of the bank’s loan assets against micro enterprise portfolio. Thus, MUDRA provides second loss default guarantee. Furthermore, it also participates in investment of Pass Through Certificates either as senior or junior investment.

Nature of Assistance

Only small businessmen can apply for this loan. Furthermore, there is no exact criteria to become eligible for the MUDRA loan. However, following are a list of things for which a business cannot take a MUDRA loan.

  • Personal Requirement
  • Educational Purpose
  • Buying Personal Car or Bike
  • Rich Businessmen

How to Apply

There is no formal way of applying for a MUDRA loan. A micro enterprise in need of funds may approach the bank listed under the MUDRA scheme. Furthermore, such an enterprise needs to give details regarding the business it intends to pursue. Then, the requisite bank asks the enterprise to fill the MUDRA form. However, the application process becomes quite easy if micro enterprise already has a current account with the said bank.

Furthermore, the enterprise must carry the invoice for the equipment purchased in case it needs to get it financed. Also, a good credit history may help since it is a collateral free loan.

III. Credit Guarantee Fund Scheme for Small Industries


The Credit Guarantee Scheme intends to avail bank credit without any collateral or third party guarantees to the young entrepreneurs. This scheme provides credit to the MSME sector without the hassle of giving any collateral or guarantee. Furthermore, it intends to give wings to the dreams of small business owners to set up a unit of their own.

Thus, the Indian government and SIDBI established the Credit Guarantee and Fund Trust for Micro and Small Enterprises (CGFTMSE).

CGTMSE introduced a new ‘Hybrid Security’ model. This model provides guarantee cover for the part of credit facility not covered by collateral security. Thus, the Money Lending Institutions (MLIs) are allowed to obtain collateral security for the portion of the credit facility under this scheme. The remaining part of the credit facility, however, can be covered under the Credit Guarantee scheme of CGTMSE.  This cover is subject to a maximum of Rs. 200 lakhs. However, CGTMSE will have pari-passu charge on the primary as well as collateral security provided by the borrower for the credit facility.


The main objectives of this scheme are:

  • The Lender should lay emphasis on project viability. Further, it should extend credit facility only on the basis of primary security financed.
  • Lender should try to give composite loans to the borrowers. This means lender should help borrowers to obtain both term loans and working capital loans from a single lender.
  • The Guarantee Trust would pay for the losses incurred by the lender. The lender incurs such losses where the MSE unit availing the collateral free credit facility fails to repay its liability. This making good of losses is limited to 50%, 70%, 80% or 85% of the credit facility.

Nature of Assistance

Credit Guarantee Fund Scheme for Small Industries under Government Loan Schemes for Small Businesses in India

Eligibility Criteria

This credit facility is extended to new as well as existing micro enterprises including service enterprises. It is subject to a maximum credit cap of Rs. 200 lakhs. Furthermore, this guarantee coverage was made available to select NBFCs and Small Finance Banks off late.

How to Apply

Prepare a Business Plan

The MSE must prepare a detailed business plan in order to avail loan under this scheme. The plan should explain the viability of the project.

Choose the Lender Bank

The next step is to choose the lender from whom the loan needs to taken. Thus, the MSE is required to submit its business plan along with loan application to the selected bank.

Submit Application for Bank Scrutiny

The bank will go through the same to check the details mentioned on receiving the application and business model from the MSE.

Receiving Funds

The lender bank will submit the loan application to CGFTMSE Fund upon verification. Here, your application will be verified again. The CGFTMSE Fund will ask the back to release funds for business if it is accepted.

IV. Credit Linked Capital Subsidy Scheme For Technology Upgradation (CLCSS)


The ministry of SSI units introduced the Credit Linked Capital Subsidy Scheme in order to help SSI units upgrade technology. Thus, the SSI units are given upfront capital subsidy on institutional finance under this scheme. This  finance is given for modernization of equipment and techniques.

Previously, SSI units had no choice but to use outdated plant and machinery to manufacture goods. This was on account of:

  • inadequacy of investment,
  • lack of awareness about the quality standards and
  • no access to up to date technology

However, the growth of SSI units is dependent on the use of modern technology and its upgradation. Also, such an upgradation is essential in the plant and machinery as well as in the process used to manufacture goods. This will help the SSI units to reduce production cost and make them competitive.

Thus, the government of India announced Credit Linked Capital Subsidy Scheme. This scheme however does not apply if:

  • a business replaces existing equipment or technology with same equipment or technology
  • business upgrades with second hand machinery

Nature of Assistance

  • This scheme provides a capital subsidy of 15% on the institutional finance availed by SSI units. The subsidy is given for introducing improved technology. This technology is implemented in the sectors or for the products approved under the scheme.
  • Furthermore, the amount of subsidy given is based on the loan amount not exceeding Rs. 1 crore.
  • The amount of capital subsidy given to an SSI unit is calculated on the basis of the purchase price of plant and machinery. Thus, this calculation is not based on the loan amount disbursed to the beneficiary unit.
  • This means the government has abolished the previous practice. The previous practice categorized SSI units based on the amount of investment. This practice was followed to determine the eligible subsidy.

Eligibility Criteria

  • Eligible beneficiaries include:
    • sole proprietorships
    • partnerships
    • co-operative societies
    • private and public limited companies in SSI sector.Women entrepreneurs would be given priority.
  • The capital subsidy is available only for specific projects under the scheme. These projects are the ones where term loans have been sanctioned by eligible Primary Lending Institutions (PLIs)on or after September 29, 2005. Furthermore, machinery purchased under Hire Purchase Scheme of National Small Industries (NSIC) is also eligible.
  • An industry moving from small scale to medium scale status shall also be eligible for assistance. Provided such a shift is due to sanction of additional loan under CLCSS .
  • Capital subsidy given under CLCSS is not linked to any of the refinance schemes of the Nodal agencies. This means it is not essential for a PLI to seek refinance from any of the nodal agencies. It is with regards to the loan sanctioned by PLI.
  • Labour intensive and/or export oriented new sectors/ activities will be considered for inclusion under the scheme.

How To Apply?

The government introduced online application and tracking system. This system was introduced in order to make the application process easy under the scheme.

Therefore, the PLIs apply online on behalf of eligible MSEs in order to claim subsidy under the scheme. This is because such MSEs avail term loans from these PLIs. PLI then uploads the completed application through Online Tracking and Application System to the associated nodal agency.

Consequently, such nodal agency refers the application online to the office of DC (MSME) for release of subsidy. Then due approval is given by the competent authority along with the internal finance wing. This happens once the application is processed. However, such an approval is subject to the availability of funds.

Finally, funds are released to the nodal agencies. These agencies further transfer it to PLIs where the account of MSE is operated.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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