2 weeks Ago
The government is planning to introduce a collateral-free term loan scheme for micro, small, and medium enterprises (MSMEs) to strengthen their manufacturing capabilities. Finance Minister Nirmala Sitharaman announced that the scheme will soon be presented to the Cabinet. NSE This move could transform MSME financing in India, enabling more small businesses to access essential funds without needing to pledge assets.
What is the collateral-free loan scheme? The scheme removes the requirement for collateral, a barrier that often prevents small businesses from securing loans. Without needing assets as security, MSMEs could access financing more easily, allowing them to invest in growth, operations, and expansion. The government aims to boost the MSME sector’s contribution to the economy by making credit more accessible.
Benefits of collateral-free loans for MSMEs Easier access to credit: MSMEs without significant assets can secure loans, promoting wider financial inclusion within the sector. Enhanced growth potential: With funds available, businesses can scale up production, invest in innovation, and enter competitive markets. Improved financial health: Collateral-free loans can help MSMEs manage cash flow, cover daily expenses, and build a stronger credit history.
Economic impact: MSMEs make up a large portion of India’s GDP and employ millions. Strengthening this sector could drive economic growth and job creation across the country. Ashish Bhandari, Founder of EZ Capital, described the scheme as a major boost for MSMEs, especially in a post-pandemic economy where many businesses are rebuilding.
“This scheme removes one of the biggest hurdles—affordable credit access,” he said. Bhandari believes the scheme will improve MSMEs’ liquidity and cash flow. Challenges and what needs to happen This shift to collateral-free lending requires banks to change how they assess risk, as they no longer have collateral as a fallback.
New risk models and credit evaluation techniques will be essential to minimise defaults. Roshan Shah, CEO of VoloFin, views the scheme as a potential game-changer. However, he noted that this shift may challenge traditional banks, which have long relied on collateral to secure loans.
Shah pointed out that banks would need to adjust their risk assessment models to effectively manage this new approach. Shah emphasised that banks will need advanced credit assessment tools to navigate this shift. Effective implementation is crucial for success.
Ashish Bhandari suggested that for the scheme to work, loans must reach smaller MSMEs, especially in tier 2 and tier 3 cities. A strong monitoring system will be needed to prevent misuse and ensure funds are used productively..
