Why the government decided on interest subvention schemes for MSMEs

For a fraction of the capital required for big enterprises, India's Micro, Small and Medium Enterprises (MSME) contribute immensely to the economy. There are over 63 million MSME units in India that employ 110 million people. Further, they account for 45% of production in the country and contribute 40% of its exports. Numbers show the importance of the MSME sector to the economy, and it is something that the government acknowledges. The Interest Subvention Scheme is a step to offer financial support to the sector.

The Interest Subvention Scheme

Launched in November 2018, it provided a 2% interest subvention on new loans or incremental loans to GST registered MSME units. The scheme was applicable during the financial years 2018-19 and 2019-20. However, it was later extended till the end of the financial year 2020-21. 

The beneficiary MSME unit must have a valid Udyog Aadhaar Number and GST number to be eligible for this scheme. However, subsequent relaxations in the eligibility criteria were introduced by the government. The loan or working capital must be availed from a scheduled commercial bank. 

Purpose of interest subvention scheme

Despite the industry's size, only a small portion of these units are registered. With the eligibility criteria enforced by the interest subvention scheme, more and more units would want to get registered. Expansion in the coverage of GST and UAN within the MSME sector was one of the reasons why the government introduced these eligibility criteria in the scheme. Besides, implementation of the scheme would also be more effective if the beneficiaries are registered under a central database, viz. UAN and GST.

However, it was observed that the benefits of this scheme were not cascading down to many MSME units as UAN and GST registration acted as a hindrance. To ensure better reach of the scheme, the government subsequently removed the UAN requirement from the eligibility criteria. Besides, MSME units that were not required to register for GST were allowed to furnish their PAN and enjoy the reduced interest rate benefits. Alternately, the lending institution allowed such units to get their loan account identified as an MSME borrower account. 

The direct benefit of the interest subvention scheme was a reduction in the cost of credit. More and more MSME units were expected to be attracted to loans with a reduced interest rate. This, in turn, would increase the productivity and expansion in both services as well as manufacturing units within the MSME sector.

How was the scheme implemented?

The interest was calculated on the incremental working capital or term loan from the date of disbursal or the date of notification of the scheme, whichever is later. It will be calculated on the outstanding balance periodically as received by the lending scheduled commercial bank. The loan must not be a non-performing asset during the period for which the interest subvention is calculated. 

The nodal lending institutions file a half-yearly claim with information on the loan disbursed and branch-wise interest relief thereon. These half-yearly claims are then submitted to the Small Industries Development Bank of India (SIDBI). The whole scheme was monitored by the Governing Board of the Ministry of MSME. 

The timing of the scheme also seemed beneficial in hindsight due to the pandemic outbreak. MSME units hit by the effects of the COVID-19 pandemic were able to get much needed financial assistance through this scheme. The scheme itself was extended by a year to ensure this support to the MSME sector.

MSME units can also go for a Working Capital Loan from HDFC Bank to fuel their financial goals. With loans of up to Rs 10 lakh, it offers an ideal opportunity for small businesses to use funds for their immediate business growth plans. Besides, with flexible tenure of up to four years and an attractive interest rate, HDFC Bank Working Capital Loan can be the ideal source of finance for any small business in India. So reach out to your Relationship Manager or visit the closest branch to know more.

If you are a micro or small business owner seeking additional financing, HDFC Bank has numerous customised solutions to help you. You can also apply for a Working Capital Loan to get started. For further details, reach out to your Relationship Manager or visit the closest branch to know more.

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Read more on MoFPI Schemes and how MSME’s can gain from them by clicking here.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. All loans for MSMEs, at the sole discretion of HDFC Bank limited. Loan disbursal is subject to documentation and verification as per Banks requirement.