The MSME (Micro, Small, and Medium Enterprises) sector is known as the nation's backbone. It plays a significant role in shaping the growth of the Indian economy. With over 6.3 crore units, the MSME sector is one of the worst-hit industries due to the Coronavirus outbreak and the subsequent nation-wide lockdown.

To provide financial relief to cash-strapped MSMEs, the government has announced several fiscal incentives for the MSME sector as part of the mega Rs. 20-lakh-crores Covid-19 relief package. One major impetus for MSMEs is the announcement of collateral-free automatic loans worth Rs. 3-lakh-crores.

Here, in this guide, let's take a closer look at the collateral-free automatic loans for MSMEs announced by the central government as part of the Covid-19 relief package.

Overview of the Collateral Free Automatic Loans for MSMEs as part of the Covid-19 relief package

As the central government looks to strengthen and restart the national economy post the Covid-19 lockdowns, Finance Minister Ms. Nirmala Sitharaman has announced a whopping Rs. 3-lakh-crores collateral-free automatic loans for MSMEs and other businesses. This scheme is part of the Rs. 20 lakh crores Atmanirbhar Bharat Abhiyan package announced by the Prime Minister to kick-start the economy, impacted by the Coronavirus outbreak. 

A draft circular has been issued by the Finance Ministry to banks and NBFCs, detailing the implementation of this scheme. The collateral-free automatic loans are available to micro, small, and medium enterprises as well as other businesses.

According to the draft, the collateral-free loan scheme will include Rs. 2.8 lakh crore automatic loans and subordinated debts worth Rs. 20,000 crores for stressed MSMEs. The automatic loan scheme will cover only existing borrowers with an outstanding maximum credit limit of Rs. 25 crores and with an annual turnover of up to Rs. 100 crores. The eligibility criteria also include borrowers who have past dues of up to 60 days.

The credit is 100% guaranteed by the central government via the CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises). However, note that borrowers do not have to pay any guarantee fees. 

Currently, the Finance Ministry has sought feedback from banks and NBFCs on the scheme's implementation details to further fine-tune it.

Additional Reading: What Are The Benefits Of MSME Loan?

What does the term "collateral-free automatic loans" mean?

Generally, when a business owner approaches a bank or NBFC for a business term loan, he/she has to submit collateral or guarantee to become eligible for the loan offer. However, this is a big hurdle for businesses, especially small businesses, as they do not have an asset or property to pledge.

With a collateral-free loan, borrowers do not have to pledge any asset or collateral to avail of the loan. The government acts as the guarantor, in this case. This is a massive benefit for MSMEs that do not have any collateral to fall back upon.

The term "automatic" means eligible MSMEs, and businesses can avail of this loan quickly without having to go through a lengthy eligibility and sanction process. The implementation of this scheme is to be speedy and hassle-free, thereby reducing the loan approval process significantly.

Besides these loans, the government also has announced various other financial incentives and measures to help MSMEs resume their operations post-lockdown.

Who can avail of the collateral-free automatic loans announced by the central government?

As per the announcements made by Ms. Nirmala Sitharaman, the Union Finance Minister, these loans are available to MSMEs and businesses with an annual turnover of up to Rs. 100 crores and an outstanding credit limit of up to Rs. 25 crores. 

What are the features of the collateral-free automatic loans for MSMEs? 

Nature of loan:

It includes both working capital and term loans for MSMEs and other businesses. 


The collateral-free automatic loans for MSMEs will have a tenure of four years.

Interest Rates:

As per the announcement by the Finance Ministry, interest rates will be capped. Additionally, these loans will have a moratorium of 12 months on the principal repayment. This means borrowers can start repaying the principal 12 months after availing of the loan.

As per the initial draft, banks can charge interests up to 9.25% for the collateral-free automatic loans, while NBFCs can charge interests up to 14%.

What is the quantum of these loans? 

In her announcement, the Finance Minister stated that the amount of collateral-free automatic loans sanctioned will equal 20% of the overall outstanding credit of all MSMEs in India, as on 29th February 2020. This approximately equals Rs. 3 lakh crores. 

Who offers these loans? 

Both banks and NBFCs (Non-Banking Financial Corporations) will offer loans under this scheme. 

What are the benefits of the collateral-free automatic loans?

As part of the mega Covid-19 fiscal relief package, MSMEs can borrow collateral-free automatic loans up to a total of Rs. 3 lakh crores. This is a massive relief to cash-strapped MSMEs facing one of the most severe economic downturns in recent times.

Additionally, these loans have a long tenure of four years. This offers ample time for businesses to get back on their feet and stabilise their operations. With the loan amount, MSMEs can boost their cash flow, thereby avoiding firing employees. Indirectly, the collateral-free automatic loans will help in arresting the growing unemployment rates in the country.

In a nutshell, these loans offer significant relief to millions of MSMEs that are in dire need of working capital to boost cash flow. 


A Much Needed Helping Hand for Struggling MSMEs

The MSME sector is one of the worst-hit industries due to the Coronavirus outbreak. The collateral-free automatic loan sanction scheme comes as a major relief to businesses across industries. The move is intended to benefit 45 lakh small businesses across the country. Besides the collateral-free loans, the subordinate debt will further help an additional 2 lakh small businesses.

Check out the terms and conditions of this scheme and approach your preferred bank or NBFC, if you want to benefit from it.