The government is set to launch a low-cost Micro Credit Card for small businesses by January, aiming to cut their borrowing costs by up to 50%.
Typically, a steep 30–40% annual rates are charged on regular credit cards.
Intended to ease short-term working capital stress for micro enterprises, the new card will offer a credit limit of Rs 5 lakh along with a standard interest-free period of 15–30 days, similar to conventional cards but with significantly lower rollover interest thereafter.
How Credit Guarantees Slash Interest Rates
To achieve this reduction, the government is in discussions with banks to halve the interest rates by linking the card to an established credit guarantee framework such as the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) or the Credit Guarantee Fund for Micro Units (CGFMU).
The guarantee will substantially reduce lenders’ default risk, enabling them to offer cheaper credit. Banks are currently upgrading their technology systems to support the product rollout.
As announced in the Union Budget for FY26, the target is to issue 10 lakh cards in the first year and around 2 lakh in 2025–26, with the ultimate objective of bringing effective borrowing costs down to about 15–18% annually.
Designed for cash flow
A key objective of the initiative is to reduce the persistent cash flow strain faced by micro units, many of which wait up to 90 days or more for payments from larger buyers.
Such delays often disrupt their ability to meet operational expenses, manage payroll, or maintain production cycles. Recognising this, the government is working with banks to design a repayment mechanism suited to longer cash flow cycles.
Instead of penalising small firms with high interest charges as soon as the interest-free window ends, the proposal is to allow them to pay a lower, more manageable rate on outstanding dues. Of course, borrowers may have to pay a small premium similar to annual fees charged on credit cards by banks.
Officials said the goal is to ensure the card remains a supportive financing tool rather than a debt trap, especially since many micro enterprises, often run by individuals, lack adequate financial literacy to navigate complex credit card terms.
Given that the scheme cannot be retracted once launched, the government aims to resolve operational and design challenges upfront.
India’s MSME sector comprises over one crore registered units, employs 75 million people, and contributes significantly to manufacturing output and export growth. Ensuring its financial stability is crucial to strengthening India’s position as a global manufacturing hub.