Understanding the difference between PMEGP loan interest rates and regular bank loan interest rates is crucial if you’re planning to finance a business—whether it’s manufacturing, retail, services, or agriculture. Choosing the right loan type can save you lakhs in interest costs, improve your cash flow, and make your business more profitable.
In this detailed guide, we compare interest rates, eligibility, repayment terms, subsidy benefits, processing fees, and real-world impact to help you decide which financing option is better for your business.
What is a PMEGP loan?
PMEGP (Prime Minister’s Employment Generation Programme) is a government-backed loan scheme designed to generate self-employment opportunities by supporting micro and small enterprises.
Key features of PMEGP:
Subsidy assistance (margin money support)
Lower interest burden for eligible beneficiaries
Targeted at first-time entrepreneurs
Can be used for manufacturing/service businesses
Includes training and handholding support
The key advantage of PMEGP lies in its government subsidy and preferential interest rate structure.
What Are Bank Loans?
Bank loans refer to credit facilities offered by:
Public Sector Banks
Private Banks
Cooperative Banks
Regional Rural Banks (RRBs)
They include:
- Term loans
- Working capital loans
- Cash credit
- Overdraft facilities
- Business loans
Interest rates are set by the bank based on credit profile, loan amount, tenure, security, and risk.
Interest Rate: PMEGP Loan vs Bank Loan
PMEGP Loan Interest Rate
Under PMEGP, interest rates are subsidized through the Margin Money Support Scheme, which means:
Subsidy is provided on project cost.
Beneficiaries pay interest on subsidized loan portion.
The effective interest burden is lower compared to normal bank loans
Typically, the effective interest rate on PMEGP loans can be 3% to 7% lower than regular commercial interest rates because of the subsidy.
👉 Exact interest rate depends on:
- Bank policies
- Beneficiary category (General, SC/ST, Women)
- Project risk profile
- Credit score
The effective interest rate after subsidy is usually significantly lower than bank rates.
Regular Bank Loan Interest Rate
Bank loans are priced based on multiple factors:
Credit score (CIBIL), business age & financials
Collateral security
Revenue & cash flow
Loan tenure
Typical interest rate range for standard business loans in India:
10%–15% per annum (approx.)
(Lower for top-rated borrowers; higher for riskier businesses)
Banks generally charge interest based on:
- Base rate / MCLR / External Benchmark Rate
- Spread depending on risk profile
Head-to-Head Comparison: PMEGP vs Bank Loan
| Feature | PMEGP Loan | Bank Loan (Commercial) |
| Interest Rate | Lower (after subsidy) | Higher (no subsidy) |
| Eligibility | MSME applicants, first-time entrepreneurs | Business or individual with credit history |
| Subsidy | Up to 15%–35% margin money | None |
| Collateral | May require | Often required depending on amount |
| Tenure | Up to 5–7 years | Varies 3–10+ years |
| Processing Fees | Lower / Waived | Standard bank charges |
| Repayment flexibility | Moderately flexible | Depends on bank policy |
| Approval likelihood | High for eligible schemes | Depends on credit profile & business plan |
Example: Interest Burden Comparison
Assume you apply for a ₹20 lakh loan:
PMEGP Loan Case
Project cost: ₹20 lakh
Margin money subsidy: ₹4 lakh (20%)
Loan amount: ₹16 lakh
Effective interest rate: ~9% (after subsidy impact)
Tenure: 7 years
Total interest paid over tenure: Lower due to subsidy effect
Regular Bank Loan Case
Loan amount: ₹20 lakh
Interest rate: 12%
Tenure: 7 years
Total interest paid: Higher due to lack of subsidy
Even a 3% difference in interest rate can save significant interest amounts over multiple years.
Factors Affecting Interest Rates
Interest rates for both PMEGP and bank loans depend on:
1. Credit Profile: Higher CIBIL score → Lower interest rate
2. Business Financials: Better revenue & profit → Better pricing
3. Collateral Security: Secured loans → Lower interest vs unsecured
4. Loan Amount & Tenure Longer tenure & higher amounts can increase risk premium
5. Bank/Scheme Policies: Scheme support (PMEGP) → Lower interest burden
Advantages of PMEGP Over Regular Bank Loan
Lower interest burden because of government support
Subsidy reduces margin money requirement.
Lesser processing fees
Encourages first-time entrepreneurs
The requirement of collateral may be relaxed to some extent.
Support for training and project planning
Drawbacks of PMEGP Loan
Limited to eligible schemes & sectors
The subsidy portion is disbursed after verification.
The approval process can be documentation intensive.
The beneficiary must meet eligibility conditions strictly
When Should You Choose a Bank Loan? Instead?
While PMEGP is beneficial, there are cases where a regular bank loan may be suitable:
- You do not qualify for PMEGP eligibility
- You need higher loan amounts without subsidy caps
- Your credit history is strong
- You need flexible security options
- You want a customized repayment schedule
In such cases, negotiating interest rates with banks based on your financial strength may result in competitive pricing.
Tips to Get Lower Interest Rates
Whether applying under PMEGP or bank loans:
Maintain a strong credit history.
Prepare detailed project report & CMA data.
Offer good collateral if possible.
Choose a shorter repayment tenure (if cash flow allows).
Compare offers from multiple banks.
Use government scheme benefits wherever eligible
These steps not only reduce interest costs but also improve loan sanction chances.
Conclusion
When comparing the PMEGP loan interest rate vs. the bank loan interest rate, the biggest advantage of PMEGP is the lower effective interest cost due to government subsidy. For eligible entrepreneurs, PMEGP is usually a better option than a regular commercial loan, especially for first-time business owners.
However, both loan types have their strengths. Banks provide flexible loan amounts, a variety of credit products, and customized terms, while PMEGP offers lower rates, subsidies, and easier entry for new entrepreneurs.
Choosing the right loan depends on your eligibility, business plan, repayment capacity, and credit profile.You can contact us at +91 9001329001 for any query or if you require our services to prepare a project report or a bank loan.
FAQs
1. What is the interest rate under the PMEGP loan?
PMEGP loans generally follow normal bank interest rates, but the effective burden becomes lower because the government provides a margin money subsidy ranging from 15% to 35%, reducing the actual loan amount on which interest is calculated.
2. Are PMEGP interest rates lower than regular bank loans?
The nominal interest rate may be similar to standard bank loans, but due to subsidy support, the overall repayment burden under PMEGP becomes lower compared to regular commercial business loans without subsidy benefits.
3. Do banks decide PMEGP loan interest rates?
Yes, banks determine the applicable interest rate under PMEGP based on their lending benchmarks, credit profile, and risk assessment. However, the government subsidy reduces the overall financial burden on the borrower.
4. Can I negotiate interest rates on a regular bank loan?
Yes, interest rates on regular bank loans can often be negotiated depending on your credit score, business performance, collateral offered, and relationship with the bank, especially for larger or secured loan amounts.
5. Which is better: a PMEGP loan or a regular bank loan?
PMEGP is generally better for eligible first-time entrepreneurs due to subsidy benefits. However, established businesses with strong financials may prefer regular bank loans for higher flexibility and customized repayment options.
