Business

Steps to determine the EMI (Equated Monthly Installment) for an MSME loan

March 8, 2023
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MSME (Micro, Small and Medium Enterprises) loans are financial products that provide small businesses with the capital they need to grow and expand. These loans are usually provided by banks and financial institutions and require the borrower to repay the loan amount with interest in regular installments. These installments are commonly known as Equated Monthly Instalments (EMI). In this blog, we will discuss how to calculate the EMI for an MSME loan.

Before we proceed to the calculation, let’s understand the key components of an MSME loan
EMI.

  • Loan Amount: The total amount borrowed from the lender is the loan amount.
  • Rate of Interest: The interest rate charged by the lender on the loan amount is the rate of interest.
  • Loan Tenure: The duration of the loan is the loan tenure.

EMI Calculation Formula:

EMI is calculated using the following formula:
EMI = [P x R x (1+R)^N] / [(1+R)^N-1]
Where:
P = Loan amount
R = Rate of interest (monthly)
N = Loan tenure (in months)

Let’s take an example to understand the calculation of EMI for an MSME loan:

Suppose you have taken a loan of Rs. 10,00,000 for a tenure of 5 years (60 months) at an interest rate of 10% per annum.

First, we need to calculate the monthly interest rate (R). This can be done by dividing the annual interest rate by 12 (number of months in a year). In this case, the monthly interest rate would be:

R = 10% / 12 = 0.008333
Now, we can use the EMI formula to calculate the monthly instalment. Plugging in the values,
we get:
EMI = [10,00,000 x 0.008333 x (1+0.008333)^60] / [(1+0.008333)^60-1]
EMI = Rs. 21,865.21

So, the EMI for the given loan amount, interest rate and tenure is Rs. 21,865.21.

In conclusion, calculating the EMI for an MSME loan is essential to plan and manage your finances effectively. By understanding the EMI calculation formula and plugging in the loan amount, interest rate, and tenure, you can determine the monthly instalment you will be required to pay. Remember to choose a loan that offers a comfortable EMI amount that suits your business needs and cash flow.