A Reserve Bank of India (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.
If the central bank approves the recommendation, the banking regulator will have to amend its July 1, 2010 circular that prescribes a maximum Rs 10 lakh for collateral-free loans.
The proposal is part of a report prepared by the eight-member RBI committee tasked with reviewing the current framework for the MSME sector. The panel, headed by former Securities and Exchange Board of India chairman U K Sinha, on Tuesday submitted its report, which is expected to be made public by the central bank on Friday.
The committee is learnt to have suggested various long-term solutions for the economic and financial sustainability of MSMEs. 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.
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.
In 2018-19, about 60 million loans worth Rs 3 trillion were sanctioned under Mudra, according to the PMMY website, which was also the target amount. For the next year, the government’s target is similar.
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.
“As on February 1, 2019, over 15.73 crore loans amounting to Rs 7.59 trillion have been extended by MLIs (member lending institutions) under the PMMY, since inception of the scheme. Almost 73 per cent of the loans under the PMMY have been extended to women borrowers,” then Minister of State for Finance Shiv Pratap Shukla said in a written reply to the Rajya Sabha on February 12.
However, he also said that loans worth Rs 7,277.31 crore turned sour at the end of March 2018, as these were given mostly to first-time borrowers with no credit history.
The Pradhan Mantri Mudra Yojana (PMMY) was launched on April 8, 2015
It provides loans up to Rs 10 lakh to non-corporate, non-farm small/micro enterprises
These loans are given by commercial banks, RRBs, small finance banks, cooperative Banks, MFIs and NBFCs
Mudra has created three products —Shishu, Kishore and Tarun — to signify the stage of growth and funding needs of the beneficiary
As of Feb 1, 2019, over 157 million loans amounting to Rs 7.59 trillion extended by MLIs under PMMY since its inception