An expert committee from the Reserve Bank of India (RBI), which focuses on micro, small and medium enterprises (MSMEs), has recommended that the cap on collateral-free loans be doubled from Rs 10 lakh to Rs 20 lakh. These modifications will apply to borrowers under the Mudra scheme, self-help groups, and MSMEs. A collateral-free loan is a type of loan where borrowers aren’t required to offer any asset or pledge collateral as a guarantee.
History of Collateral-Free Loans
The current limit of Rs 10 lakh on collateral-free loans was set by the RBI in June 2010. As the name signifies, these loans do not require borrowers to provide an asset or pledge collateral. In essence, they allow individuals and businesses to borrow without risking their personal or business assets.
Recommendations for MSMEs
The committee has also proposed various long-term solutions for the financial stability of MSMEs. The report includes the recommendation of making the restructuring of stressed loans mainstream, considering that the central bank had granted a one-year window to banks to implement this measure in January 2019. This proposal was part of a report prepared by an eight-member committee of the RBI that was tasked with reviewing the framework for the MSME sector. The committee was led by former chairman of the Securities and Exchange Board of India, U K Sinha.
The Definition of Micro, Small & Medium Enterprises (MSMEs)
As per the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006, MSMEs are defined on the basis of capital investment made in plant and machinery, excluding investments in land and building. Manufacturing units investing below Rs 25 lakh are classified as Micro, between Rs 25 lakh and Rs 5 crore as Small, and between Rs 5 crore to Rs 10 crore as Medium.
However, the government is contemplating on changing this definition. The proposed change in a new draft suggests using annual turnover, rather than investment size, as the criterion for classifying these units. The proposed thresholds for Micro, Small, and Medium units, according to turnover, are up to Rs 5 crore, up to Rs 75 crore, and up to Rs 250 crore, respectively.
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| Category | Current Definition (Investment) | Proposed Definition (Turnover) |
|---|---|---|
| Micro | Up to Rs 25 lakh | Up to Rs 5 crore |
| Small | Rs 25 lakh to Rs 5 crore | Up to Rs 75 crore |
| Medium | Rs 5 crore to Rs 10 crore | Up to Rs 250 crore |
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About Pradhan Mantri MUDRA Yojana (PMMY)
The Pradhan Mantri MUDRA Yojana (PMMY) scheme was launched in 2015 to offer loans up to 10 lakh to non-corporate, non-farm small/micro enterprises. These loans are classified as MUDRA loans under PMMY and are provided by Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs, and NBFCs.
Under PMMY, MUDRA has created three products; ‘Shishu’ for loans up to Rs.50,000, ‘Kishore’ for loans above Rs.50,000 and up to Rs.5,00,000, and ‘Tarun’ for loans above Rs.5,00,000 and up to Rs.10,00,000. As of 1 February 2019, more than 157 million loans amounting to Rs. 7.59 trillion have been disbursed under PMMY since its inception.