RBI panel on MSMEs recommends doubling collateral-free loans limit to Rs 20 lakh

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RBI panel on MSMEs recommends doubling collateral-free loans limit to Rs 20 lakh

The Committee under the chairmanship of former Securities and Exchange Board of India chairman UK Sinha was set up in January this year to suggest long-term measures for the economic and financial sustainability of the MSME sector

There could be some good news for over 63 million Micro, Small and Medium Enterprises (MSMEs) in the days ahead. An eight-member expert committee, constituted by the RBI, has reportedly recommended doing away with collateral security for loans up to Rs 20 lakh extended to units in this sector - the current ceiling is Rs 10 lakh as notified in the regulator's July 1, 2010, circular.

The Committee under the chairmanship of former Securities and Exchange Board of India chairman UK Sinha was set up in January this year to suggest long-term measures for the economic and financial sustainability of the MSME sector, which accounts for over 7 per cent of India's GDP and employs over 117 million people. The panel's recommendations come at a time the country is in the midst of an economic slowdown and unemployment is at a four-decade high as per the latest available government data (FY18).

"This [enhanced ceiling] will be extended to borrowers falling under the Mudra scheme, self-help groups, and MSMEs," a person privy to the development told the Business Standard. The report has also mentioned mainstreaming the restructuring of stressed loans, considering the central bank had given a one-year window to banks to do so in January.

Incidentally, Prime Minister Narendra Modi's flagship scheme Pradhan Mantri Mudra Yojana (PMMY) met its annual lending target for the third successive year in FY19. The scheme, launched on April 8, 2015, offers loans up to Rs 10 lakh for non-agricultural activities. The loans are classified into three categories depending on the beneficiary unit's growth stage and funding needs. While 'Shishu' covers loans up to Rs 50,000, the Kishore category covers loans above Rs 50,000 and up to Rs 5 lakh, and Tarun for higher loan amounts.

In FY19, about 60 million Mudra loans worth over Rs 3.21 lakh crore were sanctioned against a set target of Rs 3 lakh crore, which was quite a feat given that the target for the year was a whopping 23 per cent higher than the FY18 target. If the Sinha committee's recommendations are accepted, then the Mudra loans ceiling also stands to be doubled and PMMY may set a new record.

But this also raises concerns over bad debt. Former RBI governor Raghuram Rajan had red-flagged Mudra loans for potential credit risk in September 2018. And in February, the government informed Parliament that loans worth Rs 7,277.31 crore of public sector banks under the Mudra scheme had turned bad at the end of March 2018. Till that point, loans to the tune of Rs 5.71 lakh crore had been extended by the member lending institutions.

The Sinha committee submitted its report on Tuesday and it is expected to be made public by the apex bank on June 21.

Also read: Modi govt scores a hat-trick; achieves Mudra loan target of Rs 3-lakh crore in FY19

Also read: The Looming Danger

Edited by Sushmita Choudhury Agarwal