Centre plans to scrap performance bank guarantees for MSME contracts

The Indian government is considering scrapping performance bank guarantees for MSME government contracts, two officials told Livemint. The MSME ministry is discussing the proposal with the DPIIT. The move aims to free up working capital for India's 74 million MSMEs, which account for over 30% of GDP and employ over 320 million people.

Under current rules, MSMEs winning government contracts worth over Rs 10 lakh must provide a bank guarantee worth 3-10% of the project value. The government is exploring replacing this with its existing credit guarantee schemes, which offer collateral-free loans. Industry stakeholders, including the India SME Forum, have long demanded this change, saying guarantees tie up vital working capital.

A report by axiTrust estimated that nearly 4.5% of India's GDP, about Rs 15 trillion, remains frozen in bank guarantees. Former RBI deputy governor R. Gandhi said the change would improve MSME liquidity and lower operating costs. The proposal is under discussion between the MSME ministry and DPIIT.