Interest Subvention Scheme for MSMEs – A Complete Guide

Introduction

The Interest Subvention Scheme (ISS) for Micro, Small, and Medium Enterprises (MSMEs) is a government initiative aimed at reducing the financial burden on small businesses by providing interest relief on loans. Launched in November 2018, the scheme is designed to boost credit flow to MSMEs and promote their growth by making borrowing more affordable.

The scheme provides an interest subvention (rebate) of 2% per annum on fresh or incremental loans taken by eligible MSMEs from scheduled commercial banks (SCBs), cooperative banks, and non-banking financial companies (NBFCs).

Objectives of the Interest Subvention Scheme

The key objectives of the scheme are:

• To reduce the cost of credit for MSMEs and enhance their financial viability.
• To encourage formal lending to MSMEs and bring more small businesses under the formal financial system.
• To support the expansion and modernization of MSMEs by providing affordable credit.
• To promote job creation and economic growth by enabling MSMEs to access funds easily.

Eligibility Criteria

To avail of the benefits of the Interest Subvention Scheme, MSMEs must meet the following criteria:

1. Business Classification

• The business must be classified as a Micro, Small, or Medium Enterprise (MSME) as per the MSME definition under the Udyam Registration framework.
• MSMEs engaged in manufacturing, trading, and service sectors are eligible.

2. Loan Type

• The scheme applies only to fresh or incremental term loans or working capital loans.
• Loans should be availed from Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Cooperative Banks, and NBFCs.
• The maximum eligible loan amount for interest subvention is ₹100 lakh (₹1 crore) per borrower.

3. Compliance Requirements

• The MSME must have a valid Udyam Registration (earlier known as Udyog Aadhaar).
• The enterprise must be GST-registered (if applicable).
• The MSME should not be classified as a Non-Performing Asset (NPA) as of the loan sanction date.
• Loans obtained from government-subsidized schemes (e.g., MUDRA, Stand-Up India) are not eligible.

Interest Subvention & Financial Benefits

• MSMEs receive an interest subvention (rebate) of 2% per annum on their outstanding loan amount.
• The interest relief applies for one year from the date of loan disbursement.
• The maximum loan amount considered for the benefit is ₹1 crore.
• The subsidy is credited directly to the MSME’s bank account.

Example Calculation

How to Apply for the Interest Subvention Scheme?

The application process for availing of interest subvention is straightforward and can be done through the respective bank.

Step-by-Step Process

1. Visit the Lending Bank/NBFC:

   • MSMEs must approach their lending institution (bank or NBFC) and inform them about their interest in availing the subvention.

2. Loan Application & Documentation:

   • Submit the loan application along with necessary documents, including:
     • Udyam Registration Certificate
     • GST Registration (if applicable)
     • PAN Card, Aadhaar Card
     • Business Incorporation Certificate
     • Bank Account Details

3. Loan Disbursement:

   • Once approved, the loan amount is disbursed to the MSME’s account.

4. Interest Subvention Claim:

   • The lending institution automatically credits the 2% interest relief on the outstanding loan amount every quarter.
   • The bank submits claims to the Small Industries Development Bank of India (SIDBI), which is responsible for processing and reimbursing the subvention amount.

Key Features and Benefits of the Scheme

1. Reduced Borrowing Cost: MSMEs benefit from lower interest rates, making business expansion more affordable.
2. No Additional Documentation: Banks handle the claim processing, ensuring a hassle-free process for entrepreneurs.
3. Encourages Formal Financing: More MSMEs are encouraged to seek loans from banks instead of informal sources.
4. Available for Multiple Sectors: The scheme covers MSMEs in manufacturing, trading, and service industries.
5. Boosts Business Growth: Affordable credit allows MSMEs to invest in infrastructure, equipment, and working capital.

Challenges Faced by MSMEs in Availing Interest Subvention

1. Lack of Awareness: Many MSMEs are unaware of the scheme or how to apply.
2. Delays in Loan Processing: Some banks take time to approve loans, causing delays in subsidy disbursal.
3. Limited Scope: The scheme only covers loans up to ₹1 crore, which may not be enough for larger MSMEs.
4. Bank Compliance Issues: Some banks are reluctant to participate due to paperwork and regulatory constraints.

Government Initiatives to Improve the Scheme

• Awareness Programs: Conducting webinars and training for MSMEs.
• Simplified Claim Process: Digitalization of subvention claims via online platforms.
• Stronger Bank Support: Encouraging NBFCs and banks to actively promote the scheme.

Comparison with Other MSME Loan Schemes

Success Stories

1. Handicraft Business in Rajasthan: A small business owner took a ₹50 lakh loan and saved ₹1 lakh in interest under the scheme, helping him scale up production.
2. Women-Owned Bakery in Delhi: A woman entrepreneur availed of a ₹25 lakh loan and saved ₹50,000 annually in interest costs.
3. Tech Startup in Bangalore: A startup used the scheme to reduce its loan interest, enabling faster hiring and expansion.

Conclusion

The Interest Subvention Scheme for MSMEs is an essential initiative that helps small businesses reduce their financial burden and improve credit accessibility. By offering a 2% interest rebate, the scheme encourages MSMEs to seek formal financing, invest in business expansion, and contribute to economic growth.

Key Takeaways

✅ Reduces loan interest burden for MSMEs
✅ Covers loans up to ₹1 crore
✅ Available through banks, NBFCs, and cooperative banks
✅ Easy application process through lending institutions
✅ Encourages MSMEs to access formal credit

Official Links for Application & Information

• MSME Ministry: https://msme.gov.in
• SIDBI (Scheme Implementation Body): https://www.sidbi.in
• Udyam Registration (MSME Registration): https://udyamregistration.gov.in

Read more about Prime Minister’s Employment Generation Programme (PMEGP) - here

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