Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSME)

Overview

The Mutual Credit Guarantee Scheme for MSMEs (MCGS-MSME) was announced in the Union Budget 2024-25 and operationalised by the National Credit Guarantee Trustee Company Limited (NCGTC) from 24 February 2025. The scheme aims to provide collateral-free credit up to ₹100 crore to eligible MSMEs for purchasing equipment and machinery, addressing one of the biggest barriers to MSME growth — lack of collateral for large loans.

NCGTC provides 60% guarantee coverage to Member Lending Institutions (MLIs) for loans sanctioned under MCGS-MSME, significantly reducing the risk for banks and encouraging them to lend to MSMEs without requiring collateral security. The scheme was formally launched by Finance Minister Nirmala Sitharaman.

Key Features

Guarantee Coverage

NCGTC provides 60% guarantee coverage to Member Lending Institutions (MLIs) for credit facilities sanctioned under the scheme. This means if an MSME defaults, the lending institution recovers 60% of the outstanding amount from the guarantee fund.

Loan Structure

• Loans up to ₹50 crore: Repayment period of up to 8 years with a moratorium of up to 2 years on principal instalments.
• Loans above ₹50 crore: Higher repayment schedule and moratorium period may be considered based on the project.
• All loans are collateral-free — no asset pledge required from the MSME borrower.

Equipment/Machinery Requirement

At least 60% of the project cost must be for purchase of equipment or machinery. This threshold was revised downward from the original 75% in the February 2026 modifications to broaden the scheme’s reach.

Fee Structure

• Upfront contribution: 5% of the loan amount at the time of guarantee application.
• Annual Guarantee Fee: Nil in the year of sanction; 1.5% per annum for the next 3 years; 1% per annum thereafter.
• Credit guarantee validity: Expires after 10 years (as per 2026 revised guidelines).

Eligibility Criteria

• MSME must possess a valid Udyam Registration Number (URN).
• Loan purpose must be primarily for purchase of equipment and machinery.
• The borrowing entity must qualify as a Micro, Small, or Medium Enterprise under the MSME Development Act, 2006.

February 2026 Modifications

The government revised the scheme in February 2026 to expand its coverage:

• Services sector included: Originally limited to manufacturing MSMEs, the revised scheme now covers services sector MSMEs as well.
• Equipment cost threshold reduced: Minimum equipment/machinery share of project cost reduced from 75% to 60%, making more projects eligible.
• Upfront contribution flexibility: The 5% upfront contribution can now be paid in tranches after the fourth year, easing the initial cash burden on MSMEs.
• Support for exporters: Explicit inclusion of MSME manufacturers and exporters in the scheme coverage.
• Guarantee expiry: Credit guarantee now explicitly expires after 10 years from the date of issuance.

About NCGTC

The National Credit Guarantee Trustee Company Limited (NCGTC) is a wholly-owned company of the Government of India under the Department of Financial Services, Ministry of Finance. It was set up to manage and operate various credit guarantee trust funds. NCGTC acts as the trustee for guarantee funds including CGTMSE (for micro and small enterprises), CGFMU (for MUDRA loans), and now MCGS-MSME.

Latest Developments

• July 2024: Union Budget 2024-25 announced the MCGS-MSME scheme for MSME credit guarantee.
• December 2024: Government approved operational guidelines for the scheme, fulfilling the Budget announcement.
• 24 February 2025: NCGTC formally operationalised MCGS-MSME; FM Sitharaman launched the scheme.
• February 2026: Scheme modified to include services sector MSMEs, reduce equipment cost threshold from 75% to 60%, allow upfront contribution in tranches, and explicitly support MSME exporters.
• March 2026: Revised operational guidelines issued with guarantee expiry set at 10 years.

Prelims Importance

• Implementing agency: NCGTC (National Credit Guarantee Trustee Company Limited)
• Guarantee coverage: 60% of loan amount by NCGTC
• Maximum loan size: ₹100 crore (collateral-free)
• Equipment/machinery cost: minimum 60% of project cost (revised from 75%)
• Upfront contribution: 5% of loan amount
• Annual guarantee fee: Nil (year 1) → 1.5% (years 2-4) → 1% (year 5 onwards)
• Scheme duration: 4 years or until cumulative guarantee of ₹7 lakh crore
• Eligibility: MSME with valid Udyam Registration Number
• Guarantee expiry: 10 years from date of issuance
• Moratorium: Up to 2 years on principal (for loans up to ₹50 crore)
• NCGTC is a wholly-owned company of Government of India under DFS, Ministry of Finance

Mains & Interview Importance

GS Paper 3 — Economy (Industrial Policy, MSME Growth):

• Discuss the significance of credit guarantee schemes in addressing the credit gap faced by MSMEs in India. How does MCGS-MSME complement CGTMSE?
• Evaluate the role of collateral-free lending in promoting MSME formalization and manufacturing growth under the Make in India initiative.
• The 2026 modifications expanded coverage to services MSMEs and exporters. Analyse the implications for India’s services-led growth model.

Interview Angle:

• “MSMEs contribute about 30% to India’s GDP but face a credit gap of over ₹20 lakh crore. Can guarantee schemes like MCGS-MSME bridge this gap, or do we need more fundamental reforms in the banking system?”
• “The 60% guarantee still leaves 40% risk with the bank. Is this sufficient to change lending behaviour toward MSMEs?”