Banking Article, Banking Finance 2020, Banking Finance July 2020

Interest Subvention Scheme to Formalize MSMEs and Facilitate Growth

  1. Introduction:

Micro, Small and Medium Enterprises (MSMEs) plays an important role in Indian economy, it accounts 45% of manufacturing output of country. In terms of employment generation, it accounts next to agriculture sector, contributing 8% to GDP. This sector is the backbone of India’s economy and is considered the ‘cradle’ of ‘Make in India’ initiative.

Being majority of MSMEs are unorganized and cash-dependent, this sector witnessed the impact of Note-ban (demonetization) and roll out of Goods and Service Tax (GST). The biggest challenge is that formalization of sector, according to an estimate, 90 per cent of the MSME sector falls in the unorganized sector, not a tech-savvy, making it difficult for schemes and programmes.

Despite a slew of measures such as ‘Make in India’, ‘Skill India’, ‘Digital India’, ‘Start-Up India’ etc. taken by Govt. along with various incentives for the sector, may find it difficult to outreach unregistered MSMEs.

Considering, 1) Access to credit, 2) Access to market, 3) Technology upgradation, 4) Ease of doing business, and 5) A sense of security for employees as five key aspects for facilitating MSME sector. Govt. made twelve announcements to address each of these five categories.

Twelve initiatives taken by GOI on 02nd November 2018:


Ø  For GST registered MSMEs 2 % interest subvention on fresh or incremental  loan

Ø  Interest subvention on export credit increased from 3% to 5 %

Ø  Visit by Inspector through computerized random allotment to get rid of Inspector Raj.

Ø  Single consent water & air pollution laws.  Only 10 % units will be inspected.

Ø  Single annual return on 8 labour laws & 10 Central rules

Ø  PSUs to source 25 % of annual procurement from MSME instead of 20 %

Ø  PSUs to source 3 % from MSMEs run by women.

Ø  Central PSUs to compulsorily procure  through Government e- Market Place portal

Ø  Rs.6000 crores for creation 100 technology centers.

Ø  GoI to bear 70 % of cost for establishing pharma cluster.

Ø  TReDs platform

As part of ‘Access to Credit’, in addition to “psb loans 59 loan portal” and “TReDS (Trade Receivables Discounting System)”, 2% interest subvention for all GST registered MSMEs has been announced on 2nd November 2018 to reward MSMEs who had faced significant compliance challenges during the GST rollout. With linkage of interest subvention with GST registration, it has been made clear that it is becoming the basic business identification tool which will be linked to various measures in the future.

The Scheme is applicable to both manufacturing and service enterprises, provides incentives for onboarding on GST platform which helps in formalization while reducing the cost of credit to MSMEs.

  1. Interest Subvention Scheme for to MSMEs 2018.

The Scheme will be in operation for a period of two financial years, FY 2019 and FY 2020 and salient features of the scheme are as under;

  1. Eligibility:
  • Enterprises should have valid Udyog Aadhaar Number (UAN) and registered with GSTN (Goods and Service Tax Network).
  • Incremental term loan or fresh term loan or incremental or fresh working capital extended from 2nd November 2018.
  • The term loan or working capital should have been extended by Scheduled Commercial Banks.
  • All working capital or term loan would be eligible for coverage to the extent of 100 lakh only.
  • If facility/ies are extended to a MSME is/are more than Rs.100 lakh, interest subvention would be made available for a maximum financial assistance of Rs.100 lakh only.
  1. Not eligible:
  • MSME exporters availing interest subvention for pre-shipment or post-shipment credit.
  • MSMEs already availing interest subvention under any of the Schemes of the State / Central Govt.
  1. Operational Guidelines:
  • The interest relief will be calculated at 2% per annum on outstanding balance from time to time from the date of disbursal / drawal or the date of notification of this scheme, whichever is later, on the incremental or fresh amount of working capital sanctioned or incremental or new term loan disbursed by eligible institutions.
  • The interest rates charged to MSMEs shall conform to Code of Ethics and Fair Practices Code as published by respective institutions.
  • The loan accounts on the date of filing claim should not have been declared as NPA as per extant guidelines in force. No interest subvention shall be admissible for any period during which the account remains NPA.
  1. Submission of Claims:
  • SIDBI act as single national level nodal implementation agency to process & settle claims from eligible lending institutions.
  • Half Yearly claims shall be submitted to SIDBI, Mumabi.
  • All claims have to be duly certified by the statutory auditors of the eligible institutions.
  • Disbursement of interest subvention against each claim to individual institution shall be only after release of funds from Ministry of MSME or GOI.


  1. Obtaining of Udyog, Aadhaar Number; (perquisite for submission of claim)

A large number of enterprises in India simply remains unregistered due to the cumbersome paperwork involved in the process. Now It is a voluntary registration based on a self-declaration, for running unit not for upcoming units. The registration is simplified and the Ministry of MSME has introduced an online one page Udyog Aadhaar memorandum.

Institutions engaged in financing the MSME sector had recommended the universalization of the registration. Thus, the concept of ease of registration was originated such that MSME’s are able to avail the benefits under various Schemes of Central/ State governments.

Documents and Information Required for Online Udyog Aadhaar Registration: (,, )

  • Aadhaar Number of an applicant – Only a natural person can apply on the behalf of a business.
  • Details of the applicant
  • Name -The applicant name as mentioned on the Aadhaar Card issued by UIDAI.
  • Social category- Whether applicant fall in General/ Scheduled Caste/ Scheduled Tribe/ Other Backward Caste has to be specified along with the documentary proof of the same as required by the concerned authority.
  • Name of Enterprise- An applicant can do more than one business in different names. A person may carry on multiple business activities at one time or may become a partner or director in more than one firm or company respectively.
  • Form of Business- An applicant has to specifically select the form in which the business is being carried on. Different forms of business can be a Proprietorship, Partnership, Limited Liability partnership( LLP), Company Registration etc.
  • Address of the business
  • Date of Commencement of businesses.
  • Previous Registration Details – If a business already registered as MSME is filing for Udyog Aadhaar Number then it must provide details of previous registration in the application form.
  • Bank Details.
  • Major Activity – Nature of activity of the business is to be provided along with the code specified for it.
  • NIC Code – These registrations are location specific and the applicant must mention National Industrial Classification Code (NIC Code). Each location is allotted a code number which can be taken from National Industrial Classification Handbook.
  • Person employed – The total number of people employed in the business.
  • Investment in Plant Machinery / Equipment – Amount of money invested in terms of machinery and equipment by the business.
  • DIC – Details of the District Industry Center nearest to the business, if required.
  1. Benefits to MSMEs:
  • The two percent interest subvention will reduce the cost of the borrowing of the MSMEs, which will translateinto profitability of the MSMEs.
  • Formalizing of the MSME will increase number of MSMEs under tax net, which improve the tax collection to government.
  • Formalizing of MSMEs will help the financing institution for better credit appraisal and decision making while extending loans to MSMEs.
  • Formalizing of MSMEs improve the scope for digital lending by the fintech companies.


Support and Outreach Initiative for Micro, Small and Medium Enterprises (MSMEs), Govt. of India has taken a slew of measures to augment growth. Despite many initiates through schemes and programs, benefits are not reaching the unorganized MSMEs. It is an initiative of the GOI, announcing 2% interest subvention Scheme of MSMEs, where registration with GSTN (Goods and Service Tax Network) and obtaining of Udyog Aadhaar are mandatory. This will help in formalizing of economy while extending incentives to MSMEs. Formalizing of MSMEs may pave a path for digital lending to cater the needs of small borrowers. Currently this scheme is implanted through Scheduled Commercial Banks only and NBFC are not covered, which are aggressive in lending to MSMEs.

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