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Tata Capital > Blog > COVID-19 > Government Updates > Steps to apply for collateral-free MSME loans under the COVID-19 Relief package

Government Updates

Steps to apply for collateral-free MSME loans under the COVID-19 Relief package

Steps to apply for collateral-free MSME loans under the COVID-19 Relief package

The Indian Prime Minister’s address to the nation had kicked off a flurry of activities from the finance minister and she responded by making five tranches of announcements to bring the Indian economy back on its rails.

The MSME sector is among the largest contributors to the Indian GDP at about 30% and definitely the largest contributor to exports at about 50%. It is also the second largest employer, next to agriculture, providing employment to about 11 crore Indians.

The sector hosts a massive number of MSME entities that operate in India. There are over 63 million units spread equally in the rural and urban areas. Owning to the lockdown the economic activity has come to a standstill and the MSMEs are the hardest hit. It is little wonder that the finance minister announced some important measures to revitalize the sector.

One of the major measures is the collateral-free automatic loans worth Rs 3 lakh crore guaranteed by the Central Government with liberal terms benefitting 45 lakh MSMEs.

Additional Read - Check out the new MSME insolvency codes from COVID-19 Relief Package

This measure is aimed at the viable MSMEs and the terms of the loan are


  • Viable standard account MSMEs 
  • Turnover of less than Rs 100 crore
  • Outstanding of less than Rs 25 crore
  • No additional collateral
  • Loan fully guaranteed by the central government


The features of the automatic loan extended to MSMEs are as follows:

  • 20% of outstanding loan as on 29 February 2020
  • No additional collateral
  • Loan fully guaranteed by the central government; risk weight is zero
  • 12 month moratorium on principal repayment
  • 4-year tenure
  • No guarantee fee
  • Scheme open up to 31 October 2020


The interest can vary depending on the lender as follows:

  • Banks -  marginal cost lending rate plus 1 percent
  • NBFC – up to 14%

Other terms

  • MSMEs with more than one lender can avail from any one lender
  • RBI approval required for government guarantee
  • Lender will have second charge of assets already pledged

Based on the above eligibility conditions and other terms MSMEs can apply to bank, the Small Industries Development Bank of India (SIDBI), National Credit Guarantee Trustee Company Ltd (NCGTC) and NBFCs. These lending institutions have sent proposals to the government for approval and once the approval is received MSMEs can apply to these agencies and avail the automatic loan as per eligibility conditions.

Additional Read - 3 Lakh Crore COVID Relief Package for MSMEs: How will this benefit the MSMEs and Start-ups?

The automatic loan scheme is likely to help 45 lakh MSMEs spurring them into revitalizing their business with ready credit available to them. They have four years to repay the loan and one year moratorium on principal repayment. Thus, these MSMEs have one year to recoup their businesses to pre-Covid-19 period without any cash flow on financing the automatic loan.

On the other side banks and other lending institutions should be ready to lend as the loans are fully guaranteed by the central government. Hitherto, though flush with funds, banks were not ready to lend.

With these and other measures, the government hopes to revive the economy.

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