Low-cost credit cards for micro firms on the cards – SME News

The government is preparing a scheme under which banks will issue credit cards with a Rs 5 lakh limit to micro enterprises to help them meet immediate working capital needs at affordable interest rates. The scheme will include credit guarantee cover, a first for such a product.

Currently, credit cards come with an interest-free period of up to 30-45 days, which can differ across cards and banks. After the interest-free period, banks charge a 2-2.5% interest rate per month or a 25-30% interest per annum. Some banks charge even higher rates.

Addressing Cash Flow Gaps for Micro Units

Small firms often face cash flow challenges, particularly with delayed payments from larger companies, sometimes stretching to 90 days or more. This can impact their ability to cover operational costs, pay suppliers, and manage payroll, potentially disrupting production cycles.

So, a scheme is being worked out following the budget announcement to introduce customised credit cards for micro enterprises registered on the Udyam portal. In the first year, 1 million such cards will be issued.

“The challenge is balancing the credit cycle, interest rates, and financial education for customers,” a senior official said. The government aims to avoid creating a significant liability and is exploring existing guarantee schemes to reduce interest rates.

The government is conscious of the fact that paying credit card bills fully in 30-45 days will become a problem when cash flow cycles in micro enterprises are 90 days or more.

So, it is discussing with banks to work out a mechanism whereby these small units only pay a lower interest rate for their outstandings beyond the interest-free period.

Guarantee Backing to Reduce Costs

However, the government will not provide any direct subvention under the scheme to credit card providers.

“But a credit guarantee is something which we can cover so that the risk comes down and the losses come down for banks. So, the customer is given the benefit of pricing on that, and the interest rate is brought down to a level which is manageable to the customer,” another official said.

The government is trying to converge the scheme with the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) or Credit Guarantee Fund for Micro Units (CGFMU) for guaranteeing the outstanding on such credit cards.

“The goal is to keep the interest rate manageable to prevent debt burdens,” the official said, adding that the scheme could be ready by September.

Often, micro enterprises run by individuals don’t have adequate financial education to understand how a credit card functions. Once the scheme is operational, it can’t be shut down immediately or easily. So, the government is keen to address all possible problems at the beginning itself.

Over 1 crore registered MSMEs, employing 75 million people, and accounting for 36% of the country’s manufacturing and 45% of exports growth. Stability of MSME sector is important to further India’s position as a global manufacturing hub.

The Union Budget 2025-26 introduced a series of measures aimed at strengthening the MSMEs. To help businesses expand and improve efficiency, the investment and turnover limits for MSME classification have been raised. Access to credit is set to improve with an increase in the credit guarantee cover for micro and small enterprises, startups, and export-focused MSMEs. A new scheme will provide financial support to first-time entrepreneurs from disadvantaged backgrounds, while sector-specific initiatives will enhance productivity in areas such as footwear, leather, and toy manufacturing.

_{Images are for reference only.Images and contents gathered automatic from google or 3rd party sources.All rights on the images and contents are with their legal original owners.}