Why in news?
The government announced changes to the Mutual Credit Guarantee Scheme (MCGS), launched in January 2025 to support loans for equipment purchases by Micro, Small and Medium Enterprises (MSMEs). The modifications aim to widen eligibility and improve terms for borrowers.
Background
Under the original scheme, the National Credit Guarantee Trustee Company (NCGTC) provides a 60 % guarantee on loans up to ₹100 crore extended by member lending institutions to manufacturing MSMEs for buying machinery. Borrowers contribute an upfront premium that is refundable over time. The scheme helps banks lend more to equipment‑based projects by sharing risk.
What has changed?
- Refundable contribution: The 5 % upfront contribution paid by borrowers is now partially refundable from the fourth year onward. Earlier, this amount was locked in until the guarantee period ended.
- Service sector inclusion: Service sector MSMEs are now eligible to use the scheme. Previously, only manufacturing units could avail the guarantee.
- Reduced minimum equipment cost: The scheme now covers equipment that accounts for at least 60 % of the project cost, down from 75 %, making it easier for firms with diversified expenditures to qualify.
- Defined guarantee tenure: A clear guarantee period of 10 years has been specified, providing predictability to both lenders and borrowers.
- Special window for exporters: Export‑oriented units with at least 25 % export turnover over the past three years can obtain loans up to ₹20 crore with a higher 75 % guarantee. They pay a reduced 2 % contribution, and one‑half of this is refunded in the fourth and fifth years. The guarantee fee is waived in the first year and set at 0.5 % annually thereafter.
Conclusion
The modifications make the MCGS more attractive to a broader range of businesses, especially service providers and exporters. By lowering the equipment‑cost threshold and refunding part of the upfront contribution, the scheme encourages investment in modern machinery and supports the government’s goal of boosting manufacturing and exports.
Source: News on Air
