RBI panel on MSMEs suggests Rs 20 lakh collateral-free loan under Mudra Loan Sch…

RBI panel on MSMEs suggests Rs 20 lakh collateral-free loan under Mudra Loan Scheme

RBI expert committee on micro, small and medium enterprises (MSMEs) has recommended doubling the cap on collateral-free loans to Rs 20 lakh from the current Rs 10 lakh. This will be extended to borrowers falling under the Mudra scheme, self-help groups, and MSMEs, said a person privy to the development. The committee is learnt to have suggested various long-term solutions for the economic and financial sustainability of MSMEs. The panel’s recommendations have come at a time when the government is contemplating changing the definition of MSMEs.

According to the 2006 definition, manufacturing units with investment below Rs 25 lakh were termed micro, those between Rs 25 lakh and Rs 5 crore termed small, and from Rs 5 crore to Rs 10 crore medium. For service units, the corresponding amounts were up to Rs 10 lakh for micro, Rs 10 lakh-2 crore for small, and Rs 2 crore-5 crore for medium enterprises.

However, the proposed change under a new draft, as approved by the Cabinet but not yet accepted, is that annual turnover, rather than investment size, should be the criterion for such units. Under the draft, there would be no difference between a manufacturing and service unit. Micro can be up to Rs 5 crore of turnover, small up to Rs 75 crore, and medium up to Rs 250 crore of turnover should be considered.

The Pradhan Mantri Mudra Yojana (PMMY) was launched in April 2015 by Prime Minister Narendra Modi. The loans are given to non-corporate, non-farm small and micro enterprises.

The loans are given by banks and non-banking financial companies as working capital and term loans for business enterprises in manufacturing, trading and services and for agriculture activities.

Even as the loans are covered under Credit Guarantee for Micro Units, the bad debt is high. If the collateral-free loan amount is doubled, it can push up the absolute amount of bad debts too. But bankers would unlikely to double the ticket size unless the insurance cover commensurately rises.