Budget 2024: New credit guarantee scheme, Mudra loan extension to boost MSMEs

In a move to boost India’s MSME sector, Finance Minister Nirmala Sitharaman has announced extensive measures designed to bolster manufacturing and services. The new initiatives aim to ease credit access, enhance financial stability, and support global competitiveness for MSMEs.

Credit guarantee scheme

Presenting the Union Budget 2024-25, Sitharaman announced a credit guarantee scheme to facilitate term loans for MSMEs without requiring collateral or third-party guarantees.

"The scheme will operate on the pooling of credit risks of such MSMEs. A self-financing guarantee fund will provide to each applicant, guarantee cover of up to Rs 100 crore while the loan amount may be larger," she stated in the Parliament.

Abhishek Gupta, Founder and Managing Partner of Pierag Consulting LLP, noted that this scheme would only alleviate the financial barriers that MSMEs face but also promote technological advancement and productivity.

"We encourage MSMEs to use this opportunity to invest in advanced machinery and equipment, enhancing operational efficiency and market positioning. This credit scheme is a promising development for the sector, and we anticipate its positive impact on business growth and sustainability nationwide," he added.

The Finance Minister also proposed doubling the loan limit under the Pradhan Mantri Mudra Yojana Scheme from Rs 10 lakh to Rs 20 lakh. This is applicable to entrepreneurs who have successfully repaid previous loans between Rs 5 lakh and Rs 10 lakh. The scheme, launched in 2015, provides financial assistance to micro-enterprises operating in non-farm sectors.

"The new credit guarantee scheme and enhanced Mudra loans are key in empowering small businesses. The new credit assessment model, leveraging MSMEs' digital footprints, will address the lack of formal financial records and improve credit eligibility," stated Pallavi Shrivastava, Co-founder of Progcap, a fintech platform for small and medium businesses.

Credit assessment

The budgetary provisions also allow public sector banks to develop an in-house credit assessment model based on the digital footprint of MSMEs, moving away from traditional asset and turnover criteria.

Sitharaman said, "Public sector banks will build their own in-house capability to assess MSMEs for credit instead of relying on external assessment."

A mechanism will be introduced to ensure continued bank credit to MSMEs during periods of financial stress to help them avoid falling into non-performing asset (NPA) status. Sitharaman emphasised that this support would be available even when MSMEs are classified under special mention accounts due to circumstances beyond their control.

Other announcements

However, the outlay for the Guaranteed Emergency Credit Line facility for MSME borrowers has been slashed from Rs 14,100 crore in the previous fiscal year to Rs 9,813 crore in the Budget for 2024-25. The scheme, which was initiated during the COVID-19 pandemic, provides 100% guarantee coverage for additional working capital loans, enabling MSMEs to access up to 20% of their total outstanding credit, capped at Rs 5 crore.

Meanwhile, the government has maintained the allocation for the Raising and Accelerating MSME Performance programme at Rs 1,170 crore. The initiative focuses on enhancing MSME performance through capacity building, improved access to finance, and market development.

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Ecommerce export hubs, TReDS expansion

The government plans to establish ecommerce export hubs in public-private partnership mode to help MSMEs and traditional artisans access international markets.

“These hubs will provide a seamless regulatory and logistical framework to facilitate trade and export services under one roof,” Sitharaman said.

Anand Ramanathan, Partner and Consumer Products and Retail Sector Leader at Deloitte India, stated that the ecommerce hubs will enhance the efficiency of the D2C ecosystem, benefitting small vendors and aggregators by improving their operational effectiveness and market accessibility, including for exports.

Additionally, the turnover threshold for mandatory onboarding on the Trade Receivables Discounting System (TReDS) platform will be reduced from Rs 500 crore to Rs 250 crore, facilitating better liquidity for MSMEs.

The Small Industries Development Bank of India (SIDBI) is set to open new branches to expand its reach to serve all major MSME clusters within three years.

"With the opening of 24 such branches this year, the service coverage will expand to 168 out of 242 major clusters," the Finance Minister said.

She also announced financial support for the setting up 50 multi-product food irradiation units in the MSME sector, along with 100 food quality and safety testing labs with NABL accreditation.

Smitha Shetty, Regional Director, APAC at Achilles Information Limited, highlighted that the Union Budget’s emphasis on infrastructure and MSME support is crucial.

"As the backbone of our economy, MSMEs and the focus on sustainable infrastructure in the Budget lay the groundwork for integrating economic growth with environmental stewardship," she said.