– Sanjay Chavre, Advisor, TAGMA India
The Indian tooling sector, a vital component of the nation’s manufacturing ecosystem, is primarily composed of Micro, Small, and Medium Enterprises (MSMEs). These enterprises form the backbone of the tooling industry, contributing significantly to industrial growth, employment, and export potential. Despite their crucial role, MSMEs face persistent challenges, chief among them being a chronic shortage of working capital. This issue stems largely from delayed payments (T & C) by customers, extended credit cycles that strain cash flows, and escalating raw material costs. Such financial bottlenecks hinder operational efficiency and limit the sector’s ability to scale and innovate.
Recognizing the critical nature of these challenges, the government and financial institutions have introduced a range of tailored solutions aimed at easing the working capital crunch. Various schemes and lending programs have been designed to improve credit accessibility and provide flexible financing options specifically for MSMEs. Banks, both public and private, development financial institutions, non-banking entities, and government-backed schemes work in tandem to ensure that MSMEs receive the necessary support to sustain their operations and grow. This article provides an overview of these key financial interventions available to MSMEs in the Indian tooling sector.
RBI Instructions to Banks on MSME Lending
The Reserve Bank of India (RBI) mandates banks to classify all MSME loans up to ₹50 crore as priority sector lending. This ensures adequate credit flow to MSMEs. RBI guidelines also promote transparent and timely working capital financing, including in-principle approval of working capital limits for existing borrowers for a period of 10 years.
State Bank of India
As the largest public sector bank in India, the State Bank of India (SBI) offers MSMEs flexible working capital demand loans and cash credit facilities against property or other collateral. The terms include competitive interest rates linked to external benchmarks such as the REPO rate, simplified processing, and concessions for women, Scheduled Caste (SC), and Scheduled Tribe (ST) entrepreneurs. Details of their major working capital windows are provided in Annexure I.
Small Industries Development Bank of India (SIDBI)
SIDBI acts both as a refinancing institution and a direct lender, offering working capital assistance through banks and NBFCs. Its direct schemes usually focus on larger ticket sizes or specific sectors, with credit appraisal based on cash flow and competitive interest rates. SIDBI also promotes the Cluster Development Fund for sectors like tooling and supports state governments in creating infrastructure for MSME clusters. SIDBI provides options to choose banking platforms from multiple banks including IDBI, CUB, and Yes Bank.
Private Sector Banks: HDFC Bank
Private sector banks like HDFC, ICICI, and Axis also offer working capital loans under RBI guidelines.
HDFC Bank offers working capital loans to MSMEs under its MyBusiness suite. Eligibility criteria include:
- Minimum annual turnover of ₹60 lakh and up to ₹7.5 crore for standard loans; loans above ₹7.5 crore are processed under Priority Sector Lending norms.
- At least 2–3 years of operational history.
- Minimum 2 years of experience in managing the business.
- Credit score of 700 or above.
- Age of applicant between 21 and 65 years at loan maturity.
- Businesses engaged in manufacturing, trading, services, or other steady cash flow sectors.
Terms include loan amounts starting from ₹10 lakh, collateral-free loans up to ₹5 crore under CGTMSE, various loan types such as cash credit, overdraft, bill discounting, and flexible repayment schedules. Collateral ranges from property and stocks to commercial equipment or vehicles. Processing is streamlined with fast-track approvals and digital onboarding.
The National Small Industries Corporation (NSIC)
NSIC facilitates working capital finance by helping eligible MSMEs secure bank guarantees and letters of credit from partner banks. This enables procurement of raw materials and order execution. Key schemes include:
- Raw Material Assistance Scheme: Helps finance the purchase of indigenous and imported raw materials, allowing MSMEs to focus on quality manufacturing.
- Bill Discounting Scheme: Covers discounting of bills from genuine trade transactions, i.e., supplies made by MSMEs to reputed public limited companies, government departments, and private companies engaged in manufacturing or services.
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
CGTMSE plays a critical role in enabling collateral-free credit by providing guarantees to lending institutions for working capital loans up to ₹15 crore. Borrowers and lending institutions must be eligible and registered under the scheme, with the borrower paying an annual guarantee fee.
Ministry of Micro, Small & Medium Enterprises (MoMSME)
The MoMSME runs key schemes to improve working capital access, including the Prime Minister’s Employment Generation Programme (PMEGP), which offers a margin money subsidy usable for working capital. The Interest Subvention Scheme provides a 2% interest subvention on fresh or incremental working capital loans to eligible MSMEs.
Securities and Exchange Board of India (SEBI)
SEBI has eased capital raising norms for MSMEs through SME Platforms on stock exchanges, with relaxed listing norms. This allows smaller companies to raise equity capital publicly, strengthening working capital without increasing debt.
Private Capital
Non-Banking Financial Companies (NBFCs), high net worth individuals, private entities, and fintech firms such as Flexiloans, Lendingkart, and Indifi provide working capital loans with typically more flexible and quicker processes than banks, albeit at higher interest rates. Eligibility depends on digital analysis of bank statements, GST returns, and cash flows.
External Commercial Borrowing (ECB)
The RBI-regulated ECB framework allows Indian companies to borrow from foreign lenders. While traditionally used for capital assets, certain ECB tracks have been liberalized to permit working capital use, subject to eligibility criteria like maturity, cost ceilings, and end-use restrictions.
Other Sources
Trade credit from suppliers, invoice factoring and discounting via platforms like TReDS, and lines of credit from fintech companies based on real-time business performance data offer additional working capital sources.
Support for TAGMA Members on Working Capital Issues
TAGMA members seeking information, advice, or facilitation on working capital issues with banks and other financial institutions may approach TAGMA for support if their concerns are not resolved at their respective levels.
Annexure I provides details of some major working capital windows offered by the State Bank of India.
RBI’s Priority Sector Lending (PSL) Rules for MSME Lending
The Reserve Bank of India (RBI) mandates banks to allocate a significant portion of their loans to important sectors such as MSMEs under its Priority Sector Lending (PSL) guidelines. This ensures active lending to small businesses.
PSL Lending to MSMEs
- Mandatory Lending: Banks are required to lend a specified percentage of their total loans to sectors classified as the “Priority Sector,” which includes MSMEs.
- What Qualifies as an MSME Loan? Any loan extended to micro, small, or medium enterprises for business purposes qualifies as priority sector lending. This includes: Working capital for day-to-day operational expenses and term loans for purchasing machinery, equipment, vehicles, and similar assets.
Loan Limits for Automatic Classification:
- Micro Enterprises: All loans up to ₹1 crore per borrower are automatically classified under Priority Sector.
- Small and Medium Enterprises: All loans up to ₹10 crore per borrower qualify automatically under Priority Sector.
(Note: With the new MSME definition extending up to ₹500 crore, TAGMA should engage with RBI for updating these loan limits accordingly.) Loans exceeding these amounts can also qualify but require additional documentation to establish eligibility.
Focus on Weaker Sections:
A portion of the total PSL target is reserved specifically for “weaker sections,” including:
- All micro-enterprises (loans up to ₹1 crore)
- MSMEs owned by women entrepreneurs
- MSMEs owned by individuals from Scheduled Castes (SC) and Scheduled Tribes (ST)
Additional Key Benefits:
- Khadi and Village Industries: Loans to units in this sector are considered priority sector loans regardless of amount or size.
- REGP/PMEGP Beneficiaries: Loans extended under government schemes like the Prime Minister’s Employment Generation Programme (PMEGP) are included in PSL.
Collateral-Free Lending (CGTMSE): To encourage lending without physical collateral, loans up to ₹5 crore (now raised to ₹15 crore) guaranteed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) are also treated as PSL.
These RBI rules compel banks to prioritise lending to small businesses, ensuring MSMEs are not overlooked.
Source: https://rbi.org.in/scripts/NotificationUser.aspx?Id=12799&fn=2754&Mode=0#30 (Please refer to Section VI. (a) on Micro, Small and Medium Enterprises)
Key Working Capital Products from State Bank of India
The State Bank of India (SBI) offers a broad range of working capital financing solutions tailored to meet the diverse needs of MSMEs. These loan products are designed to support day-to-day operational expenses and enable businesses to manage cash flow effectively. The following section outlines some of SBI’s major working capital facilities along with their essential terms and conditions.
SBI Working Capital Loans for MSMEs: Terms & Conditions
The State Bank of India (SBI) handbook outlines several key working capital products along with their specific terms and conditions:
A. SBI MSME Bachat Plus (Working Capital Demand Loan / Cash Credit)
Purpose: To meet continuous working capital requirements for day-to-day operations.
- Eligibility: Existing profitable MSME units with a satisfactory track record of at least 3 years.
- Limit: Minimum ₹10 lakhs.
- Security:
- Primary: Mortgage of residential/commercial property OR other acceptable collateral.
- Collateral Security: Minimum 40% of the loan amount.
- Tenure: Up to 5 years for Demand Loan; Cash Credit is typically annual but subject to renewal.
- Margin: Ranges from 20% to 25% of the project cost, meaning the borrower must contribute this amount from their own funds.
- Repayment: For Demand Loan, in monthly/quarterly installments. Cash Credit is a revolving facility where drawings and deposits can be made regularly; the account must be brought to a credit balance at least once a year.
B. SBI Power Plus (Overdraft against Property)
Purpose: To meet working capital requirements, leveraging the value of property.
- Eligibility: Individuals, firms, companies, etc., owning property.
- Limit: Up to 50% of the property’s market value.
- Security: Equitable Mortgage of residential/commercial property.
- Tenure: Up to 5 years.
- Repayment: Interest is payable monthly, and the principal is repayable at the end of the tenure (bullet payment) or as agreed.
C. General Terms & Conditions Applicable to All Facilities
- Processing Fee: A non-refundable fee is charged, which varies by product and loan amount.
- Interest Rate: Linked to SBI’s External Benchmark Lending Rate (EBLR), which is Repo Rate + Margin + Credit Risk Premium. The specific margin depends on the product and the borrower’s risk profile.
- Renewal: Cash Credit and Overdraft facilities are subject to annual review and renewal.
- Drawing Power (DP): In Cash Credit, the maximum amount that can be withdrawn is based on the value of current stock and receivables, minus the margin. This DP must be calculated regularly (e.g., monthly/quarterly).
- Credit Assessment: The bank will assess the loan request based on the unit’s financial statements, banking history, business potential, and promoter experience.
- Insurance: Stocks, inventories, and mortgaged properties offered as security must be fully insured against fire and other risks, with the Bank’s interest noted.
- Penal Interest: The bank will charge penal interest for defaults such as exceeding the limit, non-submission of statements, or non-renewal of facilities on time.
Source- State Bank of India. “Know Your Loan – Grow Your Business: A Handbook for MSMEs.” Pp. 10-21. https://sbi.co.in/documents/136/49244919/KYL+GYB.pdf/2a0a8037-02df-5dfd-8f79-455d4a8ba780?t=1752483624031
Major Players and Trends in MSME Lending by Private Banks
As of the latest financial data for FY 2023-24, HDFC Bank holds the distinction of having the largest MSME portfolio among private sector banks in India. The bank leverages an extensive network and cutting-edge technology to address the diverse financing needs of MSMEs. However, HDFC Bank is part of a competitive landscape where other leading private banks have equally significant MSME lending operations. This section highlights the key players, their portfolio sizes, and important contextual nuances regarding leadership in MSME lending.
Based on the latest available financial data (typically FY 2023-24), HDFC Bank holds the title for the largest MSME portfolio among private sector banks in India.
Here’s a detailed breakdown:
The Leader: HDFC Bank
- Portfolio Size: HDFC Bank’s MSME loan portfolio is the largest, exceeding ₹3.5 lakh crore (as of recent reports). The bank has a massive network and a dedicated focus on leveraging data and technology to serve the MSME segment. They offer a wide range of products, including working capital loans, machinery loans, and trade services.
Other Major Private Players:
While HDFC Bank is the largest, other private banks also have significant and rapidly growing MSME portfolios:
- ICICI Bank: ICICI Bank is a close competitor and has consistently reported a massive MSME loan book, also in the range of several lakh crores. The bank is known for its digital platforms like the “InstaBIZ” app tailored for business customers.
- Axis Bank: Axis Bank maintains a strong focus on MSMEs with a comprehensive suite of products. They actively expand their reach by acquiring portfolios and partnering with fintech firms.
- Kotak Mahindra Bank: Kotak has a significant and fast-growing MSME portfolio, frequently highlighting robust year-on-year growth. Their focus is on integrated banking solutions tailored for businesses.
Important Context:
- Public Sector Banks (PSBs) are giants too: Notably, the State Bank of India (SBI) holds an MSME portfolio larger than any private bank, frequently cited as the largest in the entire Indian banking system. Other PSBs like Bank of Baroda and Punjab National Bank also maintain sizable MSME books due to their extensive network and mandates.
- “Biggest” can be measured in different ways: The term typically refers to the highest total loan book value, but alternative metrics such as growth rate or number of accounts (representing outreach to a broad base of micro-enterprises) add nuance to leadership claims.
How to Verify This Information:
The most reliable sources for this data are annual reports and investor presentations:
- HDFC Bank Investor Relations: https://www.hdfcbank.com/investor-relations
- ICICI Bank Investor Relations: https://www.icicibank.com/aboutus/investors.page
- Axis Bank Investor Relations: https://www.axisbank.com/investor-relations
In summary: While HDFC Bank currently leads among private banks, the MSME lending space is highly competitive, with ICICI Bank and Axis Bank as other dominant forces. For the absolute largest portfolios including public sector banks, SBI remains the undisputed leader.
Conclusion:
The Indian MSME tooling sector plays a crucial role in the country’s manufacturing and economic landscape but continues to face significant working capital challenges. A wide range of financial solutions and institutional frameworks—including RBI’s priority sector lending norms, specialized schemes by public and private banks, government-backed guarantees, and emerging fintech options—are designed to address these constraints. While progress has been made, ongoing collaboration between financial institutions, government agencies, and industry bodies like TAGMA is essential to expand credit access further, support sustainable growth, and enable MSMEs in tooling to realize their full potential in India’s evolving industrial ecosystem.
About the Author
Sanjay Chavre is Advisor to TAGMA India.
A respected technocrat and policy strategist, Mr. Chavre has been a pivotal figure in the evolution of India’s manufacturing and tooling ecosystem. With decades of experience at the intersection of government and industry, he has contributed to the development of forward-looking policies that promote indigenous technology, strengthen domestic capabilities, and uplift MSMEs within the tooling and precision engineering sectors.
Mr. Chavre has held key roles in various government departments. He has been instrumental in formulating and executing initiatives that align with India’s long-term vision for industrial growth and self-reliance. His expertise lies in enabling public-private collaboration, fostering innovation ecosystems, and building frameworks that support sustainable industrial development.
In his current role as Advisor to TAGMA India, he continues to guide efforts aimed at enhancing the global competitiveness of Indian toolmakers. His insights have been vital in positioning the Indian tooling industry as a reliable and technologically advanced partner in the global supply chain.
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