Realising the importance of timely and inexpensive access to finance, the government has launched many credit schemes to support business owners, especially those helming SMEs. Chief among these are the Mudra Loan under the Pradhan Mantri Mudra Yojana (PMMY), which aims to offer affordable financing to firms across India, and the Credit Guarantee Scheme (CGS) operated by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) that was started by the Ministry of Micro, Small & Medium Enterprises.
Both these business loans may be used by SME owners to address financing for a variety of needs, be it working capital requirements, machinery lease or purchase, or inventory purchase and payroll expenses. The advantage they offer is that the eligibility criteria is simple and the business loan interest rate is nominal.
However, keep in mind that both these loans are extended via member lenders that include both public sector and regional banks as well as small finance banks and NBFCs (non-banking financial institutions) that follow internal processes to sanction the loan and create the repayment timeline for you.
In order to encourage these member lending institutions to offer credit to SMEs, both schemes offer refinance and securitisation of the loan portfolio. Read on to understand how this works.
Mudra Loan
The Micro Units Development and Refinance Agency Ltd. (Mudra) offers refinancing to lenders for funding SMEs. Lenders can get refinancing up to Rs.10 lakh from Mudra based on the loans they have given. In addition, the agency also provides a default guarantee and securitisation of loan assets against the portfolio of micro enterprises to encourage lending activities as the Mudra loan is offered even without collateral.
Credit Guarantee Scheme
The CGTMSE also offers a guarantee to lending partners, covering the portion of the loan they offer to business owners that is not secured by assets or collateral. In case the borrower doesn’t repay the loan, the CGTMSE pays a certain percentage of the loan amount from 50% to 85% depending on the loan amount extended and the sector the borrower falls under.
What happens when you don’t repay?
When you avail the Mudra loan or financing via CGTMSE, it is important to remember that you are liable for repayment as per the terms of the lending institution. While the agency and trust operating both these loan schemes offer a credit guarantee to the lender, you still need to repay the loan. In case you are unable to do so, the lender may follow the protocol that it has in place for recovery. This can usually happen in the following ways:
- Your loan is categorised as a non-performing asset and the lender may take legal action against you
- Your business assets may be seized and sold for recovering the amount that you have defaulted on
- Your co-applicants and/or guarantors may be contacted for repayment
- Your name and your firm’s name and the name of any co-applicants may be reported to credit rating agencies like CIBIL, which will decrease your credit score
In order to prevent the above, plan your business loan repayment carefully before applying
If you are facing a slump, ensure that you talk to your lender to extend the tenor or reduce the penalties applicable on default. To make the most of customised business loans for SMEs and MSMEs that come with a competitive business loan interest rate and affordable fees and charges, you can also apply for the SME Loan offered by Bajaj Finserv. It offers funds up to Rs.30 lakh with a long repayment tenor of up to 60 months on simple eligibility criteria. To address urgent business finance requirements, you can check your pre-approved offer and enjoy instant approval.