India introduces credit guarantee scheme for small manufacturing industries

India, on Tuesday, announced a credit guarantee scheme to help manufacturing-focussed medium and small enterprises (MSME) buy machinery and other equipment without offering collateral.

"The scheme will operate on pooling of credit risks of such MSMEs," Finance Minister Nirmala Sitharaman said while announcing the federal budget for 2024-25.

A separately constituted self-financing guarantee fund will provide each applicant a guarantee cover of up to 1 billion rupees (about $12 million), while the loan amount may be larger, she said.

The borrower will have to pay an upfront guarantee fee and an annual guarantee fee on the reducing loan balance, Sitharaman added.

The government has been focusing on MSMEs because they generate employment, promote entrepreneurship and contribute to the country's growth, while reducing poverty.

Sitharaman also said the government would continue to ensure bank credit for MSMEs under stress through a guarantee from a government-promoted fund, without divulging specific details.

"While being in the Special Mention Account (SMA) stage, for reasons beyond their control, MSMEs need credit to continue their business and avoid getting into the NPA (non-performing assets) stage," she added.

In banking parlance, loans are categorised as SMA once they show early signs of stress, but have not yet turned non-performing.

The government has also doubled the limit of Micro Units Development and Refinance Agency, or MUDRA, loans to 2 million rupees for those entrepreneurs who have already repaid previous such loans, Sitharaman said.

MUDRA loans are typically given to micro-enterprises, startups, and small businesses in India, with flexible repayment terms and low interest rates.