Govt Considers Removing Performance Bank Guarantees For MSMEs To Ease Working Capital

New Delhi, Aug 18 (KNN) The government is considering removing the requirement for Performance Bank Guarantees (PBGs) for MSMEs executing public contracts, a move aimed at easing working capital constraints and improving access to government procurement.

MSME Ministry, DPIIT Examine Proposal

The proposal is being examined by the Ministry of MSME and the Department for Promotion of Industry and Internal Trade (DPIIT), as reported by The Mint.

Under the existing system, MSMEs awarded government contracts may be required to furnish PBGs equivalent to 3-10 percent of the contract value, tying up funds that could otherwise be used for business operations.

Credit Guarantees as Alternative to PBGs

The government is exploring the use of existing credit guarantee mechanisms as an alternative to traditional bank guarantees.

Such a shift could reduce the financial burden on smaller firms by allowing them to retain more working capital while providing a risk-mitigation mechanism for lenders and contracting authorities.

MSMEs Account for Half of Centre's Procurement

The move assumes significance given the growing participation of MSMEs in public procurement. MSMEs accounted for around 50 percent of the Centre's procurement worth Rs 2.30 lakh crore in FY26, underscoring their role in supplying goods and services to government departments and agencies.

Removing or reducing PBG requirements could lower entry barriers for smaller suppliers, particularly those that face high costs or limited access to bank guarantees.

Government Faces Contract Execution Risks

However, the proposed change could also increase the government's exposure to risks arising from delayed or incomplete contract execution. PBGs currently provide financial protection to government agencies in cases of non-performance or project delays.

The effectiveness of the proposed framework would therefore depend on how credit guarantee mechanisms are structured and how MSMEs are assessed for their ability to execute public contracts.

Policy Framework and Eligibility Criteria

The move comes amid broader efforts to strengthen the MSME policy framework following the passage of the Micro, Small and Medium Enterprises Development (Amendment) Bill, 2026.

The eligibility criteria for PBG exemptions, the contracts that would be covered and mechanisms for monitoring performance are expected to be key factors in determining the impact of the proposed policy.

(KNN Bureau)