Understanding India’s Credit Guarantee Scheme for MSMEs

Micro, Small, and Medium Enterprises (MSMEs) have recorded exceptional export growth, moving from ₹3.95 lakh crore in FY2020–21 to ₹12.39 lakh crore in FY2024–25. This growth underscores their expanding role in strengthening India’s economy and boosting global trade.

As more entrepreneurs join the MSME ecosystem, access to affordable and collateral-free credit becomes increasingly important for sustainable expansion and smooth operations. This is where India’s credit guarantee scheme emerges as one of the most impactful financial support mechanisms designed for MSMEs across sectors.

The credit guarantee scheme was created to make formal credit accessible even for first-generation or small entrepreneurs who lack collateral. For many, understanding how it works can be the key to better financial decisions and long-term business continuity. Let’s learn about the scheme’s purpose, features, coverage, and benefits in a clear and easy-to-understand way.

What Exactly is the Credit Guarantee Scheme?

The Ministry of MSME implements the Credit Guarantee Scheme (CGS) through the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This trust was jointly established in 2000 by the Ministry of MSME, Government of India, and Small Industries Development Bank of India (SIDBI).

It offers guarantee coverage for credit facilities extended to eligible micro and small enterprises without demanding collateral security or a third-party guarantee. For over 25 years, the scheme has played a key role in expanding credit availability for first-time entrepreneurs and underserved units. As of 1 April 2025, the ceiling of eligible credit has been raised to up to ₹10 crore per borrower under the scheme.

Why This Credit Guarantee Scheme Matters for MSMEs

The credit guarantee scheme helps bridge the credit gap that micro and small enterprises face due to a lack of collateral or a third-party guarantee. By offering coverage to lending institutions, it reduces lenders’ risk and encourages them to extend credit.

It functions as a powerful government scheme for business that formalises MSME lending and supports enterprises across India’s diverse geography and sectors. This results in higher credit flows, job creation, and deeper enterprise penetration.

Key Features of the Credit Guarantee Scheme

The credit guarantee scheme offers a number of features tailored for small business credit needs:

1. Collateral-free access: Borrowers can secure credit without pledging assets or relying on third-party guarantees.
2. Ceiling of ₹10 crore: From April 2025 onwards, credit facilities (fund-based or non-fund-based) up to ₹10 crore per eligible borrower can be covered.
3. Guarantee Coverage Percentages Vary:
   1. Up to ₹5 Lakh: 85% cover for micro enterprises
   2. Above ₹5 Lakh to ₹50 Lakh: 75% cover for the general category
   3. Above ₹50 Lakh to ₹10 Crore: 75% cover for the general category
   4. For Women Entrepreneurs, SC/ST, PwD, ZED-certified units, Aspirational District Units, or ICDD Districts: Enhanced coverage (e.g., 90% for women-led).
4. Additional 5% Cover: Units located in RBI-identified Credit Deficient Districts (ICDDs) receive an extra 5% guarantee cover above the applicable rate.
5. Coverage Tenure: For term loans/composite loans, the guarantee runs for the agreed loan term; for working-capital-only facilities, the coverage applies for up to five years.
6. Hybrid Security Model: Lending institutions can partially take collateral (for one part of the credit facility) and cover the remaining unsecured portion up to ₹10 crore under the scheme.

Who can Benefit and What Activities are Eligible?

The credit guarantee scheme covers new and existing micro and small enterprises in manufacturing, services, and trading activities. Borrowers must meet eligibility criteria, which include Udyam registration and an IT-PAN requirement for credit facilities exceeding ₹5 lakh.

Member Lending Institutions (MLIs), such as Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Non-Banking Financial Companies (NBFCs), and small finance banks, partner under the scheme. Eligibility includes first-generation entrepreneurs, women-led units, enterprises in underserved districts, and technology-driven small businesses.

How the Scheme Enhances Credit Lending for MSMEs

By offering guarantee cover, the credit guarantee scheme reduces the credit risk that lenders face when extending loans without collateral. This incentivises more credit flows to MSMEs, which might otherwise be excluded due to security constraints. It creates confidence in the lending ecosystem and promotes inclusive growth.

As a result, business units previously unable to access formal credit can now invest in machinery, technology upgrades, inventory, and working capital. This reinforces the scheme’s status as a vital government initiative for businesses in the MSME sector.

Best Practices for MSMEs Leveraging the Guarantee Scheme

To maximise benefits from the credit guarantee scheme, micro and small enterprises should follow these practices:

1. Ensure Udyam registration and complete lender documentation early.
2. Approach an MLI aware of the scheme and its requirements.
3. Prepare clear business proposals, financials, and viability reports.
4. Choose credit facilities (term loans or working capital) that align with your funding needs and repayment capacity.
5. Highlight eligibility traits such as women-led, SC/ST, PwD, or units in aspirational districts to avail enhanced guarantee coverage.
6. Monitor scheme circulars for fee discounts and reforms (e.g., guarantee fee rates revised for April 2025).

Utilise the Credit Guarantee Scheme to Grow Your Enterprise

The future of India’s MSME ecosystem rests on advanced financial frameworks that support growth and innovation. This credit guarantee scheme remains a powerful mechanism that enables small enterprises to access collateral-free credit, expand operations, and build resilience. If your business is ready to scale, upgrade, or stabilise working capital, this guarantee cover provides a safety net and unlocks trust with lenders.

Organise your documentation, partner with an MLI such as HDFC Bank that understands the scheme and process, and capitalise on the available guarantee coverage under this initiative. With inclusive access to credit, the path from a promising idea to a thriving enterprise becomes shorter and more sustainable.