MSME has been a buzz word lately after announcement of financial relief package by honorable Finance Minister. Announcements include relaxation in the threshold for coverage of units under the concept of MSME, credit guarantee to the tune of Rs 3 Lakh Crore for loans which a MSME can avail under the existing schemes (effectively meaning collateral free & more easily sanctioned loans), equity support to stressed MSMEs by provision of Rs. 20,000 crore as subordinate debt, Rs 50,000 crore equity infusion for MSMEs through Fund of Funds. Though only time will tell how demand fares in time to come to encourage the MSMEs to avail the credit, there may be a few questions in the mind of those manging businesses e.g what exactly is MSME, which businesses are covered under msme, what are other pros & cons of being an MSME, what will be the terms on which the credit will be given, which institutions offer these loans etc.
Micro, Small & Medium Enterprises (MSMEs) is recognized as major back bone of economy by the governments around the world. In India many initiatives are being taken by the governments to support the 6.8 Million MSMEs as they not only directly contribute 24.63% of the GDP from service activities and 33.4% of India's manufacturing output but also provides employment to approximately 120 million persons and contributes around 45% of the overall exports from India.
Any organization, be it a Proprietorship, Partnership or Company, which fulfills the criteria & conditions enlisted under Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 , is eligible for registration as MSME. Both existing & new Business can register as MSME, however business carrying on trading are not eligible. Interalia, the limits prescribed under the Act, post revision, are as follows:
Micro Enterprise: Investment of not more than Rs. 1 Crore & Turnover upto Rs 5 Crore
Small Enterprise: Investment not more than Rs. 10 Crore & Turnover upto Rs 50 Crore
Medium Enterprise: Investment not more than Rs. 20 Crore & Turnover upto Rs 100 Crore (this limit will increase to Investment Cap of Rs 50 Crore & Turnover limit 250 Crore from July)
Below are some of the Benefits of registering the business as MSME: 1. Cheaper Overdraft: Overdraft facility along with Interest Rate Exemption. Businesses or enterprises registered as MSME/SSI under the MSME Act are eligible to avail a benefit of 1% on the overdraft as part of the Credit Guarantee Trust Fund Scheme. Although this can vary from bank to bank
2. Collateral Free Loans: Loans without collaterals (Credit Guarantee is given by the state for which a fee of around 1 % is generally charged by Institution).
3. Protection against Delayed Payments: A person buying from MSME is expected to make the payment for the goods/services within 15 days of the purchase. If the buyer delays the payment for more than 45 days, the enterprise is eligible to charge compound interest which is 3 times the rate notified by RBI.
Further there is settlement mechanism under which the MSME can complain for recovery of debts, providing a more efficient mechanism vis a vis existing remedies available under Section 138 of Negotiable Instruments Act & Civil Suits, both of which takes at least 2 -3 years for getting a judgement.
Further Companies are required to report to MCA debts payable to MSMEs which are overdue for 45 days or more vide E Form. This will not only force companies to consider paying such debts in time, but report in EForms of dues could be an acknowledgement of Debt admissible in court of law.
4. Incubation: This scheme helps innovators with the implementation of their new design, ideas or products. Under this from 75% to 80% of the project cost can be financed by the government. This scheme promotes new ideas, designs, products etc.
5. Direct Tax Exemptions: Exemption under Direct Tax Laws e.g credit for minimum alternate tax (MAT) to be carried forward for up to 15 years instead of 10 years.
6. Contracts: There are many government tenders which are only open to the MSME Industries. 7. Concessional Patents: Once registered the cost of getting a patent done, or the cost of setting up the industry reduces as many rebates and concessions are available. 8. Concessions for Technological Improvement: Registered MSMEs gets tariff subsidies and tax and capital subsidies, e.g 15% import subsidy on fully automatic machinery. 9. Concessional ISO Certification: Remittances of expenditure on ISO certificate. 10. Concession on Electricity: One of the simplest MSME registration benefits, businesses registered under the MSME Act can avail a concession on electricity bills i.e relief is given for cess to be paid on electricity bill. All they have to do is submit the bills along with an application and a copy of the registered certificate by MSME.
Availing Concessional Credit:
These loans are provided by both Banks & NBFCs. Loans from Banks have lower rate of interest (around 9 to 10 %), against that of NBFCs, however NBFCs have more liberal terms for Grant of such loans. State institution SIDBI will also ferry into providing these loans directly to the MSMEs.
There are no standard terms for these loans and Banks have discretion in deciding conditions for providing these loans.
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