RBI Panel's Recommendations on MSME

• 19 Jun 2019

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.
• The current limit of Rs 10 lakh on collateral-free loans was prescribed by RBI in June 2010.
  
  • A collateral free loan means that borrowers do not have to offer any asset or pledge collateral to borrow against.
• The committee has also suggested various long-term solutions for the economic and financial sustainability of MSMEs.
• The report has also recommended the mainstreaming the restructuring of stressed loans, considering the central bank had given a one-year window to banks to do so in January 2019.
• 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 was headed by former Securities and Exchange Board of India chairman U K Sinha.

The MSME definition

• The Micro Small & Medium Enterprises (MSMEs) are defined under the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 on the basis of capital investment made in plant and machinery, excluding investments in land and building.
• Manufacturing units having investment:
  
  • below Rs 25 lakh are termed as Micro,
  • those between Rs 25 lakh and Rs 5 crore as Small
  • and from Rs 5 crore to Rs 10 crore as Medium.
• Service units, corresponding investment thresholds are:
  
  • up to Rs 10 lakh are termed as Micro,
  • between Rs 10 lakh to Rs 2 crore as Small
  • and between Rs 2 crore to Rs 5 crore as Medium
• However, the government is contemplating to change the definition of MSMEs.
  
  • The proposed change under a new draft 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.

Pradhan Mantri MUDRA Yojana (PMMY)

• The PMMY is a scheme launched in 2015 for providing loans up to 10 lakh to the non-corporate, non-farm small/micro enterprises.
• These loans are classified as MUDRA loans under PMMY.
• These loans are given by Commercial Banks, RRBs, Small Finance Banks, Cooperative Banks, MFIs and NBFCs.
• Under the aegis of PMMY, MUDRA has created three products namely 'Shishu', 'Kishore' and 'Tarun' to signify the stage funding needs of the beneficiary/entrepreneur and also provide a reference point for the next phase of graduation/growth.
  
  • Shishu: covering loans up to Rs.50,000
  • Kishore: covering loans above Rs.50,000 and up to Rs.5,00,000
  • Tarun: covering loans above Rs.5,00,000 and up to Rs.10,00,000
• As of Feb 1, 2019, over 157 million loans amounting to Rs 7.59 trillion have been extended under PMMY since its inception.