Prime Minister's Employment Generation Programme (PMEGP)

Micro enterprises generate most of India's non farm employment but face a financing wall. Banks ask for collateral and a track record that first generation entrepreneurs do not have. Cooperative and informal lenders charge rates that strangle a young business. PMEGP was launched in 2008 by merging two older schemes precisely to address this wall, by combining a bank loan with a government subsidy that reduces the effective borrowing burden.

The structure is simple. The entrepreneur contributes 5 or 10 percent of the project cost as own capital. The bank gives a term loan for the remainder. After the loan is disbursed, the government credits a margin money subsidy of 15 to 35 percent of project cost into the borrower's loan account. This subsidy is locked for three years and then adjusted against the principal, reducing the loan outstanding.

The result is that an entrepreneur in a rural area from a general category, setting up a Rs 10 lakh manufacturing unit, ends up with an effective loan of around Rs 6.5 lakh after the 25 percent subsidy is adjusted. For SC, ST, OBC, women, minorities, ex servicemen and applicants from the North East and hill areas, the subsidy rises to 35 percent in rural areas.

PMEGP has three implementing agencies. Khadi and Village Industries Commission handles applications in rural areas under its mandate. The State Khadi and Village Industries Board handles applications in rural areas of the state under the state mandate. The District Industries Centre handles applications in urban areas.

Picking the wrong agency is the most common reason a file gets stuck for months. The PMEGP e portal asks for the location category at the start. Rural is defined by the 2011 Census; a town that has grown since may still be classified as rural for PMEGP purposes. Check your village or town code on the portal before selecting the agency.

Each agency has a target ratio of approvals across categories and sectors. KVIC typically prioritises village industries and traditional crafts. DIC prioritises modern manufacturing and services. If your project fits a traditional category but you applied under DIC, the file may be deprioritised. The choice is yours but the practical advice is to discuss your project with both the district KVIC office and the DIC before filing.

Once the implementing agency approves the project on technical and economic grounds, the file moves to the financing bank chosen by the applicant. The bank conducts its own appraisal looking at the project report, the borrower's credit history, the collateral position and the proposed primary security of the plant and machinery.

If the bank sanctions the loan, the borrower completes the Entrepreneurship Development Programme training. This is a two week residential or hybrid programme run by accredited training partners. The subsidy is released only after the training certificate is uploaded and the first instalment of the loan is disbursed.

The subsidy is credited to a Term Deposit Receipt linked to the loan account and locked for three years. During this period, interest on the subsidy is not paid to the borrower but the loan principal is treated as reduced by the subsidy amount for EMI calculation. After three years, if the unit is operational and the loan is regular, the subsidy is adjusted against the loan principal.

The single most important document is the project report. A weak report drags the file for months and often ends in a bank decline even after agency approval. A bankable report has three parts. First, a realistic cost breakdown for land, civil work, plant, machinery, working capital and contingencies. Second, a market section that names actual customers, the product price, the competitive position and the demand evidence. Third, a financial projection for five years with monthly cash flow for year one and annual figures thereafter.

Avoid downloading a generic template. Banks see hundreds of copy paste reports and reject them quickly. Visit the district MSME Development Institute or a KVIC trained consultant for help in drafting a report that reflects your specific location, market and skill.

If the project involves machinery imports or pollution control clearances, address these in the report. A bank that suspects regulatory delays will decline rather than risk a non performing loan.

Existing PMEGP units that have completed three years of operation, repaid the first loan on time and want to upgrade or expand can apply under the PMEGP second loan window. The ceiling is Rs 1 crore for manufacturing and Rs 25 lakh for service units. The subsidy rate is a uniform 15 percent.

This window is useful for units that have built a market and need capital for new machinery, a larger premises or working capital expansion. Eligibility requires a satisfactory loan repayment track record and a viable upgradation project report.

Many entrepreneurs do not know this window exists and continue to borrow from informal lenders at high cost. If you have a successful PMEGP unit and a clear upgradation plan, apply through the same portal under the second loan option.

• 01Indian citizen aged 18 years or above
• 02Minimum education of Class 8 pass for projects above Rs 10 lakh in manufacturing or Rs 5 lakh in services
• 03First generation entrepreneur setting up a new unit; existing units are not eligible except under PMEGP second loan for upgradation
• 04Self help groups, charitable trusts, societies and cooperative societies are also eligible
• 05Applicant or family must not have availed subsidy under any other government scheme for the same activity

• §Aadhaar and PAN of the applicant
• §Caste, minority or category certificate where applicable for higher subsidy
• §Education qualification certificate
• §Detailed project report with cost estimates and projected cash flows
• §Quotations for plant, machinery and civil work
• §Proof of address of the proposed unit

• Project report copied from a template without realistic cost or market analysis
• Applicant or family member having availed subsidy under a similar central or state scheme
• Applying as an existing unit rather than a new enterprise without using the PMEGP second loan window
• Skipping or delaying the mandatory Entrepreneurship Development Programme training
• Bank declining the loan due to weak credit history of the applicant or co applicant

• PMEGP e portal and operational guidelines, Khadi and Village Industries Commissionlink ↗
• PMEGP scheme notification and circulars, Ministry of Micro, Small and Medium Enterpriseslink ↗