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The government approved a Mutual Credit Guarantee Scheme (MCGS) for micro, small, and medium enterprises (MSMEs).

What is MCGS-MSME?

The Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSME) is a government initiative aimed at enhancing financial accessibility for micro, small, and medium enterprises in India.

Eligibility and Loan Coverage: The MCGS-MSME is available to MSMEs with a valid Udyam Registration Number, providing loan guarantees of up to Rs 100 crore for purchasing equipment and machinery.
Guarantee Coverage: The scheme offers 60% guarantee coverage by the National Credit Guarantee Trustee Company Limited (NCGTC) for loans sanctioned to Member Lending Institutions (MLIs).
Project Cost Requirements: While the guaranteed loan amount is capped at Rs 100 crore, the total project cost can exceed this amount, provided that at least 75% of the project cost is allocated for equipment or machinery.
Repayment Terms: Loans up to Rs 50 crore have a repayment period of up to 8 years, including a moratorium of up to 2 years on principal repayments. For loans above Rs 50 crore, longer repayment schedules may be considered.
Scheme Duration and Fees: The MCGS-MSME will be in effect for four years from the issuance of operational guidelines or until cumulative guarantees of Rs 7 lakh crore are issued. The initial guarantee fee is waived for the first year, followed by a fee of 1.5% per annum for the next three years, and then reduced to 1% per annum thereafter.

In addition to the MCGS-MSME, several other measures have been implemented to facilitate easier access to credit for MSMEs:

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE): This scheme provides collateral-free loans up to Rs 2 crore, offering up to 85% guarantee coverage, thereby reducing lender risk.
Raising and Accelerating MSME Performance (RAMP) Program: This initiative involves an investment of Rs 6,000 crore over five years, aimed at enhancing MSME growth and performance.
Trade Receivables Discounting System (TReDS): An online platform that enables MSMEs to receive faster payments from larger companies, improving cash flow and liquidity.
Emergency Credit Line Guarantee Scheme (ECLGS): Introduced during COVID-19, this scheme provided a Rs 3 lakh crore relief package, offering a 100% government-backed guarantee for loans.
Priority Sector Lending (PSL) Norms: These regulations require banks to allocate a portion of their loans specifically for MSMEs, ensuring that they receive necessary financial support.

Access to Finance: One of the most significant challenges faced by MSMEs is obtaining timely and affordable financing. For example, The Bank of Baroda reported that over 50% of MSMEs in India could not access formal credit.
Lack of Financial Knowledge: Many MSMEs lack awareness of available financial schemes and products, which restricts their ability to access funding. For example, Many business owners remain unaware of the Shishu, Kishor, and Tarun loan schemes.

Enhanced Financial Literacy and Awareness Campaigns: There is a need for targeted outreach programs to educate MSMEs about available financial schemes, including loan products and government initiatives like Shishu, Kishor, and Tarun schemes, to ensure they are aware and can leverage them effectively.
Streamlined Loan Processes and Collateral-Free Options: Simplifying the loan application process and expanding collateral-free loan schemes like CGTMSE, along with improving credit rating systems, will ensure quicker and easier access to funds, especially for smaller MSMEs.

Q Can the strategy of regional-resource-based manufacturing help in promoting employment in India? (UPSC IAS/2019)