The establishment of a new ₹100 crore fund that will provide a government guarantee for collateral-free loans up to ₹100 crore to manufacturing MSMEs marks a pivotal shift in the credit landscape. This initiative comes in addition to the existing Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme, which has traditionally supported smaller enterprises.

Rajiv Chawla, founder of Jairaj Group of Industries and the IamSMEofIndia, an association of MSME firms, points out that medium-sized enterprises, which often struggle to secure loans after hitting the ₹50 crore mark, will now significantly benefit from this new fund. "Till now, only micro and small units used to get benefits under the CGTMSE. This new fund ensures that medium enterprises, those graduating from small to medium size, will continue to receive support," Chawla explains.

Historically, medium-sized enterprises have faced a funding gap once they exceed the ₹50 crore turnover threshold. The traditional CGTMSE scheme provided support up to ₹5 crore, leaving many deserving medium enterprises in a financial lurch. The new guarantee fund aims to address this gap, ensuring that enterprises can continue to grow without being hampered by the lack of collateral. "This initiative is extremely progressive. The ability to obtain loans up to ₹100 crore without collateral is unthinkable and immensely beneficial for the sector," says Chawla.

New credit appraisal

The budget also announced a new assessment model for MSME credit, wherein banks will develop their own in-house models with criteria based on asset and turnover.

Prashant Muddu, founder and CEO of fintech firm Jocata Financial Advisory & Technology, provides further insights into how the current credit appraisal system works and the potential improvements. Muddu's firm works closely with lenders to develop rating systems based on sales ledgers and bank statements. He emphasises that while data sources such as sales ledgers and bank statements are crucial, they are often triangulated with repayment history from credit bureaus to provide a comprehensive credit assessment.

"The data sources are the same. There's nothing new that comes. Triangulating information from a sales ledger, then looking at the bank statement to see those sales showing up in your bank statement after three, six months, gives an indication of collection efficiency, which reflects the cash flow of the business," Muddu explains.

Muddu also highlights the push for more automated and real-time assessments. "The government is trying to make a statement that these assessments should get done more in an automated fashion and in real-time. The turnaround time to let an MSME know if they have the approval or not should be a few hours, with money disbursed within a couple of days," he notes.

Currently, about 15-20% of banks are already implementing such systems, primarily using behavioural scores and sales ledger data. Muddu mentions that quicker credit using mechanisms like GST Sahay, which allows for faster underwriting of invoices, can help in faster appraisal methods.

Much-needed credit

While the credit assessment for the new fund is still not clear, Chawla points out that there are lakhs of medium-sized units in the country, many of which have a turnover beyond ₹50 crore. These enterprises are crucial for the economy, contributing to employment and growth. "With a growing economy and expanding sectors such as automobiles, many more enterprises will benefit from this initiative," says Chawla.

As of March 2024, gross bank credit to MSMEs stood at ₹24.67 lakh crore. Interestingly, credit to micro and small enterprises grew 20% to ₹19.76 lakh crore, whereas credit growth to medium-sized businesses was lower at 15.8%, growing to ₹4.90 lakh crore from ₹4.23 lakh crore during the same period.

While the interest rates for these loans will remain market-driven, the removal of collateral requirements is expected to facilitate easier access to credit. This, in turn, will enable deserving entrepreneurs to invest in their businesses without being constrained by the lack of collateral. "This initiative is a game-changer for medium enterprises, ensuring they have the financial support needed to thrive and expand," Chawla concludes.

Now, whether the fund will result in higher credit offtake to medium enterprises will be worth the wait.

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