MSMEs are the backbone of the Indian economy. They create the most jobs after agriculture and play a huge role in our country’s manufacturing output and exports. Therefore, providing them with adequate and timely finance is a top priority for banks.
What are MSMEs? The Official Definition
An enterprise is classified as a Micro, Small, or Medium enterprise based on a composite criteria of investment in plant & machinery and annual turnover. This new definition (from 2020) is very important to remember.
| Enterprise Type | Investment in Plant & Machinery | Annual Turnover |
| Micro | Not more than ₹1 crore | Not more than ₹5 crore |
| Small | Not more than ₹10 crore | Not more than ₹50 crore |
| Medium | Not more than ₹50 crore | Not more than ₹250 crore |
Udyam Registration: For an enterprise to be formally recognised as an MSME and to avail the benefits of government schemes, it must register on the “Udyam“ portal.
MSMEs under Priority Sector Lending
Lending to MSMEs is a key part of the Priority Sector targets for banks.
- Overall Target: All bank loans to MSMEs are counted towards the overall 40% priority sector target.
- Sub-Target: There is a specific sub-target of 7.5% of a bank’s total lending (ANBC) that must go to Micro Enterprises.
Key Government Schemes to Support MSME Finance
The government has launched several schemes to encourage banks to lend to MSMEs without hesitation.
1. Pradhan Mantri MUDRA Yojana (PMMY)
The MUDRA (Micro Units Development and Refinance Agency) scheme provides loans up to ₹10 lakh to non-corporate, non-farm small/micro enterprises.
- Purpose: To “fund the unfunded.” It helps small entrepreneurs like shopkeepers, artisans, and vegetable vendors get loans from banks.
- Three Loan Categories (Shishu, Kishor, Tarun):
| Category | Loan Amount |
| Shishu | Up to ₹50,000 |
| Kishor | Above ₹50,000 and up to ₹5 lakh |
| Tarun | Above ₹5 lakh and up to ₹10 lakh |
2. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
This is a brilliant scheme that provides a guarantee to the bank for loans given to Micro and Small Enterprises. Purpose: To encourage banks to lend to Micro and Small Enterprises without asking for collateral (security).
- How it works: The bank gives a collateral-free loan (currently up to ₹5 crore) to an eligible MSE. The bank pays a small fee to the CGTMSE trust. If the borrower defaults, the CGTMSE trust will compensate the bank for a major portion of the loss.
Summary
Financing the MSME sector is crucial for India’s economic growth and job creation. MSMEs are classified into Micro, Small, and Medium based on their investment and turnover. Lending to MSMEs is a key component of the Priority Sector, with a sub-target of 7.5% for Micro Enterprises. To boost lending to this sector, the government has created powerful schemes like MUDRA, which provides smaller loans up to ₹10 lakh, and CGTMSE, which encourages collateral-free lending by providing a guarantee to the banks.
Quick Revision Points
- MSME Definition: Based on Investment AND Turnover. Remember the limits: (1 Cr & 5 Cr), (10 Cr & 50 Cr), (50 Cr & 250 Cr).
- Priority Sector Sub-Target: 7.5% for Micro Enterprises.
- MUDRA: Loans up to ₹10 lakh for micro-enterprises.
- MUDRA Categories: Shishu (up to 50k), Kishor (50k – 5 lakh), Tarun (5 lakh – 10 lakh).
- CGTMSE: Provides a guarantee for collateral-free loans to Micro and Small Enterprises.
- Udyam Portal: The official portal for MSME registration.