MSME Scheme: How the Micro Finance Programme is providing funds to small businesses

To ensure easy availability of finance, the Government offers the Micro Finance Programme wherein the security deposit of loans sought by MFIs and NGOs are financed by the Government.

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To apply for the Micro Finance Programme, MFIs and NGOs would have to fill and submit their proposal in a prescribed form to SIDBI.
Run by: DCE MSME
Applicable to: MFIs, NGOs

Promoting the growth of small-scale industries and MSME businesses has been one of the most important priorities of the Government. When the MSME sector grows, it creates more jobs and tackles the problem of unemployment and poverty. The growth of MSMEs in India is a win-win for everyone. To facilitate this growth, the Indian Government has designed various programs of financial assistance for existing and potential MSMEs. These programs aim to provide budding MSMEs with financial help so that they can establish and/or grow themselves to achieve their full potential. One such scheme of the Government is the Micro Finance Programme. Let’s understand what the scheme promises.


What is micro finance?
Micro finance involves giving small loans to individuals or small businesses, who may be outside the formal banking channel so that they can meet their business related requirements.

What is the Micro Finance Programme?
SIDBI offers micro credit facilities to MSMEs who are engaged in industrial activities. These credit facilities are offered through Micro Finance Institutions (MFIs) or Non-Governmental Organisations (NGOs). MFIs/NGOs source funds from SIDBI and make the funds available to MSMEs for their commercial needs. However, for every loan availed, the MFI or NGO is required to make a security deposit with SIDBI as SIDBI offers only secured loans. The amount of security deposit is 10% of the loan amount sought. It becomes difficult for MFIs or NGOs to pay the security deposits for multiple loans due to financial constraints. This is where the Micro Finance Programme comes into the picture. The Government has launched the Micro Finance Programme in tie-up with SIDBI to provide easy and affordable loans to MFIs and NGOs.
The features of the programme are as follows:
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  • The Government would provide funds to SIDBI, which would then be used as security deposits for the loans issued to MFIs/NGOs. The funds paid by the Government to SIDBI under the Micro Finance Programme would be called ‘Portfolio Risk Fund’. SIDBI can then use this fund for security deposit requirements of the loans issued to MFIs/NGOs
  • MFIs/NGOs would have to pay only 2.5% of the loan amount as security deposit for the loan and the remaining 7.5% would be funded from the Portfolio Risk Fund paid by the Government
  • Funds would be provided by the Government in four years after the Xth Plan and would be released on a half-yearly basis as per the requirement of security deposit by SIDBI
  • Interest would be paid by SIDBI to the Government on the security deposit held. The rate of interest would be the same as that paid to MFIs/NGOs on their 2.5% deposit
  • SIDBI would be responsible for the recovery of the loan granted to MFIs/NGOs
  • When the loan is recovered fully, the Government’s contribution of 7.5% of the loan and the interest earned thereon would be rotated and used for future loans
  • SIDBI would also monitor the Micro Finance Programme
  • Besides providing financial assistance, the Government would also help SIDBI arrange training programmes for NGOs, entrepreneurs, SHGs, etc. to promote MSME growth. These training programmes would be conducted through National level EDIs and SISIs
Who runs the scheme?
The Development Commissioner of Small Scale Industries (SSIs) under the Ministry of MSME runs the Micro Finance Programme.

Who can apply?
MFIs and NGOs who source loans for MSMEs can apply for the scheme. Loans under the scheme are available for manufacturing, service sector and non-farming activities.

What is the application process?
To apply for the Micro Finance Programme, MFIs and NGOs would have to fill and submit their proposal in a prescribed form to SIDBI.
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Existing micro credit programmes had limited reach and fulfilled only up to 10% of the credit requirements of MSMEs. That is why the Government devised the Micro Finance Programme for undeserved States and undeserved pockets or districts of other States. The Government contributed Rs 6 crore towards the Portfolio Risk Fund during the 10th Plan of the Micro Finance Programme. This enabled SIDBI to offer loans of Rs 80 crore to MFIs and NGOs benefitting approximately 1.6 lakh beneficiaries if an average loan of Rs 5000 per beneficiary is considered. Moreover, the Government also increases its contribution in every budget ensuring that maximum loans are sanctioned and MSMEs can grow easily without worrying about financial needs.
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