What is the Credit Guarantee Scheme for Subordinate Debt of MSMEs introduced by the Ministry of MSME? How can I benefit from it?

The Ministry of MSME has introduced the Credit Guarantee Scheme for Subordinate Debt for stressed MSMEs (hereafter called as 'the scheme') on 24th June 2020 with a view to support MSMEs who have been stressed with the current difficult times. The scheme has been introduced with a sole objective of facilitating loans through Banks to the promoters of stressed MSMEs in order to help them infuse more equity/capital into their business. Such businesses must be eligible for restructuring under the RBI guidelines in order to be able to avail these benefits.

The ministry has laid down some pre-requisites as well as guidelines as to how any MSME can avail the benefits under this scheme. Let's break them into the below FAQs

• How can an MSME become eligible for this scheme? Which MSMEs are eligible to avail benefits under this scheme?

  • An MSME who is declared stressed after required evaluation from the lending institution and the MSME who is eligible for restructuring as per the RBI guidelines are eligible to avail benefits under this scheme.

  • MSMEs need to make sure that their accounts have been standard as of 31st March 2018 and they have been operational throughout the financial years of 2018-19 & 2019-20 only are eligible under this scheme.

  • The MSMEs should be declared stressed under SMA2 & NPA accounts as of 30th April 2020.

  • MSMEs whose accounts are declared as willful defaulters or fraud are not eligible to avail benefits under this scheme.

  • MSMEs who have obtained their Udyam Registration are only allowed to avail benefits under this scheme.

  • Till 31st March 2022, MSMEs who have their Udyog Aadhar or Udyog Aadhar Memorandum are also eligible to avail these services.

• How much loan can be availed by any MSME under this scheme? What are the guidelines for loan amount eligibility?

  • Under this scheme the loan amount is capped at 15% of the total equity of the promoter in his MSME or Rs. 75 lakhs whichever is lower as per their last audited balance sheet.
    For example: If a promoter has invested Rs. 1 Crore as equity or debt in his MSME then the loan eligibility amount will be 15% of 1 crore i.e. Rs. 15 lakhs.

  • It can be noted that not only equity but debt is also considered into total investment by any promoter in their MSME.

  • Further, it needs to be noted that out of this eligible amount of sub-debt only 90% is guaranteed under this scheme. To be able to avail this sub-debt finance the promoter needs to bring in 10% themselves as restructuring finance.

• What is the tenure of loan under this scheme? For how long will this scheme be in effect?

  • The tenure of loan is 10 years from date of availing the loan or 31st March 2021, whichever is earlier.

  • The ministry plans to have this scheme into effect until a total amount of Rs. 20,000 Crore is approved as guarantee.

• What about the interest rate? Will it be capped?

  • The interest rate at which the restructuring finance is provided will be capped. The interest rate will be decided as per RBI guidelines by the participating Scheduled Commercial Bank at the time of disbursement.

• What if the unit whose accounts were declared NPA has now closed down operations? Is it still eligible to obtain the benefits under this scheme?

  • Sadly, the answer is NO. The main requirement under this scheme is that the MSME needs to be operational and running at the time of application. It needs to prove it the promoter has vested interest in the MSME and has tried his best to keep the MSME running in difficult conditions.

• Which financial institutions are allowed to provide the benefits under this scheme? Can a NBFC also provide loans under this scheme?

  • Currently only Scheduled Commercial Banks are provided access to disbursing benefits under this scheme. No other financial institution can avail the guarantee under this scheme.