RBI suggested Rs 20 lakh collateral-free loan under Mudra for MSMEs

RBI suggested Rs 20 lakh collateral-free loan under Mudra for MSMEs

MSME Definition

For Enterprises occupied in the manufacture or production, processing or preservation of goods, the definition is:

Micro Enterprise: An enterprise where investment in the plant as well as machinery doesn’t surpass Rs. 25 lakh.

Small Enterprise: An enterprise where the investment in the plant as well as machinery is above Rs. 25 lakh but doesn’t surpass Rs. 5 crore.

Medium Enterprise:  An enterprise where the investment in the plant as well as machinery is above Rs.5 crore but doesn’t surpass Rs.10 crore.

For the above enterprises, investment in plant and machinery is the original cost which excludes land and building and additional items as specified by the Ministry of Small Scale Industries.

For Enterprises occupied in giving or rendering of services, the definition is:

Micro Enterprise: An enterprise where the investment in equipment doesn’t surpass Rs. 10 lakh.

Small Enterprise: An enterprise where the investment in equipment is above Rs.10 lakh but doesn’t surpass Rs. 2 crores.

Medium Enterprise: An enterprise where the investment in equipment is above Rs. 2 crores but doesn’t surpass Rs. 5 crore.

Doubling the cap on collateral-free loans to Rs 20 lakh from the current Rs 10 lakh for MSMEs by RBI

The expert committee of the Reserve Bank of India (RBI), on the micro, small and medium enterprises (MSMEs) has suggested doubling the cap on collateral-free loans to Rs 20 lakh from the present Rs 10 lakh. This shall be extended towards borrowers falling under the Mudra scheme, self-help groups, and MSMEs.

In case the central bank affirms the proposal, the banking controller is required to revise its July 1, 2010, circular that recommends a maximum Rs 10 lakh for collateral-free loans.

The suggestion is part of a report made by the 8 members of the RBI committee entrusted with looking into the present structure for the MSME sector. The panel had presented its report, which is expected being made public by the central bank.

The committee is found out to have proposed different long-term solutions for the economic as well as financial sustainability of MSMEs. The report has additionally referenced mainstreaming the restructuring of stressed loans, considering the central bank had allowed a one-year window towards banks to do so.

The panel’s suggestions have come at a time when the government is contemplating changing the definition of MSMEs. The committee has proposed doubling the cap of collateral-free loans for MSME units towards Rs, 20 lakh from Rs. 10 lakh now. Presently, MSMEs could receive collateral-free loans under two mechanisms: one, in view of the RBI’s 2010 circular, and the other is dependent on Credit Guarantee Fund (CGF). While the 2010 circular recommends a limit of Rs. 10 lakh, CGF discusses collateral-free loans of up to Rs. 2 crores.

The panel has recommended covering Mudra and SHGs, too, under the changed circular. presently, Mudra offers three kinds of loans – Shishu (loans up to Rs. 50,000), Kishor (loans above Rs. 50,000 and up to Rs. 5 lakh), and Tarun (loans above Rs. 5 lakh and up to Rs.10 lakh). At the moment, if the committee’s suggestion is acknowledged, at that point the loan limit under Mudra would likewise be doubled, and this shall be more gainful towards micro units.

At the end of the financial year 2018-19, the entire number of Mudra accounts attained Rs.17.80 crore, with the approved amount at above Rs. 9.26-lakh crore. There are an estimated Rs. 2.6 crore MSMEs in the nation, giving employment to almost 6 crore individuals.

MSMEs contribute 45% to the manufacturing sector’s production and 40% of the nation’s exports.

Of the considerable number of issues faced by MSMEs, non-availability of credit at reasonable interest rates is the most serious.

One of the significant causes for low availability of bank finance towards this division is the high-risk perception of banks in loaning towards MSMEs and, consequently, the emphasis on collaterals that are not effortlessly available with these sectors.

But the suggested change under another draft, as affirmed by the Cabinet however not yet accepted, is that annual turnover, as opposed to investment size, must be the paradigm for such units. Under the draft, there shall be no distinction amid a manufacturing and service unit. Micro could be up to Rs 5 crore of turnovers, small up to Rs 75 crore, and medium up to Rs 250 crore of turnovers ought to be considered.

The Pradhan Mantri Mudra Yojana

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

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

In 2018-19, approximately 60 million loans worth Rs 3 trillion were allowed under Mudra, as per the PMMY website, which was also the target amount.

Indeed, even as the loans are covered under Credit Guarantee for Micro Units, the bad debt is higher. If the collateral-free loan sum is doubled, it could push up the absolute sum of bad debts also. Yet bankers shall unlikely to double the ticket size unless the insurance cover proportionately rises.

 As on 1st February 2019, over Rs. 15.73 crore loans adding up to Rs 7.59 trillion was extended by MLIs (member lending institutions) under the PMMY, since the beginning of the scheme. Almost 73% of the loans under the PMMY were extended to women borrowers.  Also the loans worth Rs 7,277.31 crore have been turned unpleasant at the end of March 2018, as these were offered mostly towards first-time borrowers with no credit history.

About Mudra

Pradhan Mantri MUDRA Yojana (PMMY) is a scheme established by the Prime Minister Narendra Modi on 8th April 2015 for giving loans upto Rs. 10 lakh to the non-corporate, non-farm small/micro enterprises. These type of loans are known as MUDRA loans under PMMY. These loans are given by Commercial Banks, Small Finance Banks, RRBs, MFIs, Cooperative Banks and NBFCs. The borrower could approach any of the lending entities referenced above or could apply online. MUDRA has created three products namely 'Shishu', 'Kishore' and 'Tarun' towards signifying the stage of growth/development and financial support needs of the beneficiary microunit/entrepreneur and also give a reference point for the next phase of graduation/growth.


eStartIndia Team

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