RBI Panel On MSMEs Recommends Doubling Loan Limit Under Mudra Scheme To Rs 20 Lakh

A committee on micro, small and medium enterprises, set up by the Reserve Bank of India, has recommended a hike in the loan limits under the Micro Units Development and Refinance Agency Bank scheme from Rs 10 lakh to Rs 20 lakh, two people familiar with the recommendations told BloombergQuint on condition of anonymity.

The eight-member committee, headed by former Securities and Exchange Board of India Chairman UK Sinha, submitted its report on Tuesday, the central bank said in a press release. The RBI is yet to release the report. Business Standard first reported on Wednesday morning that a hike in the limit for Mudra loans to Rs 20 lakh is among the recommendations made by the committee.

At present, under the Mudra scheme, lenders provide unsecured loans to MSMEs, farm enterprises and self-help groups. The scheme offers three loan products ⁠— Shishu loans upto Rs 50,000, Kishore loans between Rs 50,000 and Rs 5 lakh and Tarun loans covering loans between Rs 5 lakh and Rs 10 lakh.

These loans are guaranteed by the Credit Guarantee Fund Trust for Micro and Small Enterprises, which is set up by the Government and the Small industrial Development Bank of India. The CGT-MSE was formed in order to guarantee lenders against any defaults on micro-loans up to Rs 10 lakh.

According to one of the people quoted above, the recommendation to allow for larger loans to be given under the Mudra scheme comes along with some safeguards. The committee has recommended that a lightly-regulated new entity called the ‘Loan Service Provider' be set up to monitor various aspects related to the loans.

The committee also suggests that a new window be set up under the Trade Receivable Discounting System or TReDS platform, which can be used to assess cash-flows of potential borrowers, this person said. An assessment of cash flows is important for MSME borrowers since their ability to provide collateral is limited.

The second person quoted above confirmed these developments adding that better monitoring of the borrowers is required by lenders and government agencies to ensure that larger loans being given under the scheme don't lead to a build-up of bad debt.

The committee's report is likely to be released later this week or next week.

Performance Of Mudra Scheme

Launched in April 2015 by Prime Minister Narendra Modi, the Pradhan Mantri Mudra Yojana, was intended to target small business borrowers who find it difficult to access formal credit from the banking system due to low credit quality and poor documentation.

According to the PMMY wesbite, in 2015-16 a total of 3.48 crore loans worth Rs 1.37 lakh crore were sanctioned. The loans given out under the scheme have risen over the past four years. In 2018-19, loans worth about Rs 3.12 lakh crore to around 5.8 crore borrowers were sanctioned under the scheme.

Though the pace of sanctioning loans and disbursing credit to MSMEs has picked up since the scheme's inception, there have been concerns about a build-up of bad loans.

According to the 2017-18 annual report available on the PMMY website, non performing assets stood at 5.38 percent as on March 31, 2018. In a response to the Rajya Sabha on February 12, Minister of State For Finance Shiv Pratap Shukla said that Rs 7,277 crore in loans given under the scheme had turned bad.

To control NPAs under the Mudra loan scheme, banks, non-banks and MFIs have systems in place to underwrite the borrowers' credit quality before sanctioning a loan, said one of the people quoted above. This person, however, said that given the push by the government to lend to MSMEs under the scheme, there is a need for an integrated approach or common portal to monitor defaults or potential frauds.

The committees' recommendations follow the Union Cabinet's decision earlier this year to change the criteria for classifying MSMEs from ‘Investment in Plant & Machinery' to annual turnover.

As per the new classification, enterprises having an annual turnover less than or equal to Rs 5 crore will fall under the ‘micro' category. Units having turnover between Rs 5 crore to Rs 75 crore will be classified as small enterprises, whereas those having turnover between Rs 75 crore.

The new rules were intended to make it easier for firms, across manufacturing and service sectors, to avail benefits given to MSMEs.