Inadequate and lack of timely credit, high cost of credit, collateral requirements, etc. pose hurdles before the Micro, Small and Medium Enterprises. Furthermore, the MSMEs are being perceived as high risk category by Banks. However, the Government has been running Credit Guarantee Fund Scheme for Micro and Small Enterprises to provide guarantee cover for collateral free credit facilities extended to micro and small enterprises (MSEs). In addition, to facilitate easy flow of credit to Micro, Small and Medium Enterprises (MSMEs), the Reserve Bank of India (RBI) has issued guidelines in May, 2010, which mandatorily require banks to dispense with collateral requirement for loans upto ₹ 10.00 lakh to MSEs. Furthermore, banks have been required by the RBI to have a stipulated growth in the small and micro unit accounts in the country.

 The Government has set up a Micro Units Development & Refinance Agency (MUDRA) Ltd. which would be responsible for refinancing all Micro-finance Institutions (MFIs), which are in the business of lending to micro / small business entities engaged in manufacturing, trading and services activities. MUDRA has been set up as a NBFC (wholly owned subsidiary of SIDBI), to start with. Besides, RIDF allocation of ₹ 20,000 crore, GOI is also providing a budgetary support of ₹ 3,000 crore for creation of a Credit Guarantee Mechanism which will help in extending non-collateralised credit to the target micro units. The Scheme is now being established and it is too early to assess its benefits.

 This information was given by the Minister of State, Micro, Small and Medium Enterprises, Shri Giriraj Singh in a written reply to a question in Rajya Sabha.

Collateral-free lending support bolstered by a government credit guarantee scheme and MUDRA refinancing for microenterprise finance. Limited and costly institutional credit and collateral requirements restrict micro and small enterprises' finance. The Government operates a Credit Guarantee Fund Scheme and is establishing a budget backed credit guarantee mechanism to support non collateralised lending. RBI guidelines require banks to dispense with collateral for small enterprise loans and promote growth in micro and small unit accounts. MUDRA Ltd. has been set up as a refinancing NBFC for micro finance institutions to improve refinancing and liquidity for micro and small business lending.