Government's CGTMSE Scheme and Impact on Working Capital Loans for MSMEs
With the focus on supporting small and medium enterprises (MSMEs) and promoting job creation, the Indian government has introduced significant changes under the Credit Guarantee Trust Fund for Micro and Small Enterprises (CGTMSE) scheme. These changes aim to enhance financial support for MSMEs and alleviate liquidity issues they often face.
Credit Guarantee for MSMEs
Prime Minister Narendra Modi announced during the New Year speech that the credit guarantee limit for small and medium businesses will be doubled from Rs. 1 crore to Rs. 2 crore. This expansion of the CGTMSE scheme will benefit numerous small shop-owners and enterprises by providing better access to credit. Additionally, the scheme now covers loans not only from banks but also from non-banking financial companies (NBFCs), thus broadening its reach.
Working Capital Loans and Benefits
The working capital loans for MSMEs will experience a significant boost with this new scheme. Prime Minister Modi highlighted that banks and NBFCs will not levy high interest rates on these loans as the government will bear the cost of underwriting them. This policy will reduce the burden on small enterprises, enabling them to manage their working capital more efficiently.
Typically, working capital is required for a cycle of 3-4 months. The CGTMSE scheme will provide this financial support for a period that aligns with the general cycle of working capital, eliminating the need for continuous interest payments. However, the exact duration of the loan under the CGTMSE scheme is ongoing and can be expected to last up to 5 years, providing MSMEs with a substantial financial cushion to manage their business operations.
Additional Support for MSMEs
To further support the MSME sector, the government has taken initiatives that include raising the credit limit for small industries from 20% of turnover to 25%. Additionally, banks have been directed to increase working capital loans to 30% for enterprises that transact digitally. These measures will encourage the use of digital transactions, thereby providing an added advantage to businesses operating in the digital domain.
Prime Minister Modi also mentioned that banks have been asked to consider cash deposits made by individuals in the last few weeks when calculating working capital. This move is expected to provide a more accurate and fair assessment of the credit needs of MSMEs.
Tax Relief and Boosting MUDRA Yojana
To provide further relief to small businesses, the government has announced a major tax reduction for enterprises with turnovers up to Rs. 2 crore. The income from these businesses is now calculated at 6% of the turnover for digital transactions, down from 8%. This reduction effectively lowers the tax liability by 25% for such businesses.
Regarding the MUDRA Yojana, Prime Minister Modi highlighted the encouraging progress of the scheme, with nearly 3.5 crore people benefiting from it. The government aims to double this number, giving priority to marginalized sections such as dalits, tribals, backward classes, and women to ensure inclusive growth and development.
The CGTMSE scheme, combined with other initiatives, is expected to significantly impact the MSME sector and provide considerable relief to the entrepreneurs and businesses that are vital for the economy. As the government continues to support MSMEs, it is anticipated that more sustainable and resilient businesses will emerge, contributing to job creation and economic growth.