SMEs, Small Businesses Will Soon Get Rs 20 Lakh As Collateral-Free Loan; But What’s The Catch?

The RBI appointed committee on MSMEs has recommended a major change in the structure of the collateral-free loans.

The committee has suggested doubling the amount of collateral-free loans, which is Rs. 10 lakh as of now to Rs. 20 lakh.

This change will cover all small businesses such as all self-help groups, borrowers that are a part of the MUDRA scheme, and MSMEs as well.

Read on to know all the details about this new recommendation by the committee appointed by RBI!

RBI Committee Recommends Doubling The Amount of Collateral Free Loan

RBI has set up a committee, which constitutes of eight members, to look over the current structure of the MSME (Micro, Small and Medium Enterprises) segment, and suggest notable changes. This committee is headed by former Securities and Exchange Board of India chairman U K Sinha.

The committee has submitted its report to RBI Governor Shaktikanta Das, which suggests doubling the cap on collateral-free loans, which is Rs. 10 lakh presently, and recommended to be Rs. 20 lakh. This report is to be made public on Friday by the Central Bank.

All businesses that fall under the MSMEs, MUDRA scheme (Micro Units Development and Refinance Agency) are to be covered under this new recommendation.

Wondering what collateral is? Whenever you apply for a loan, you are required to keep an asset of yours as collateral, so that if you are unable to pay the loan, or are a defaulter, the bank will have the rights to take over the asset you offered as collateral.

Other Suggestions Made In The Report: Will the Central Bank Approve?

The RBI appointed panel has recommended some other changes in the present structure of the MSME sector as well. The report drafted mentions changes such as ‘mainstreaming the restructuring of stressed loans’, for which banks were given a time period of one year by the central banks in January.

Presently, the Central Bank operates on the laws made in 2010, and if it approves the recommendations made by the committee, the circulars made in July of 2010 will need to be altered.

The Government is already on the verge of changing the whole concept of MSME. Up until now, the MSME structure was as follows:

Manufacturing Units –

• Micro – Investments below Rs. 25 lakhs
• Small – Investments between Rs 25 lakh and Rs 5 crore
• Medium – Investments between Rs 5 crore to Rs 10 crore

Service Units –

• Micro – Investments below Rs. 10 lakhs
• Small – Investments between Rs 10 lakh and Rs 2 crore
• Medium – Investments between Rs 2 crore to Rs 5 crore

Under the recommended changes, there would be no difference between the manufacturing and service units, and that annual turnover be the criteria for such categorization.

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