Sinha panel for doubling cap on collateral-free loans to MSMEs


In News

  • A Reserve Bank of India (RBI) expert committee on micro, small and medium enterprises (MSMEs) headed by U K Sinha has submitted its report to the RBI.



  • The MSME sector accounts for over 7 per cent of India’s GDP and employs over 117 million people. It contributes 45 per cent to the manufacturing sector’s output and 40 per cent to the nation’s exports.
  • Of all the problems faced by MSMEs, non-availability of credit at reasonable interest rates is the most severe.
    • This is because of the high-risk perception of banks in lending to MSMEs due to which they insist on collaterals that are not easily available with these enterprises.
    • Due to their predominantly informal nature, MSMEs are vulnerable to structural and cyclical shocks, at times with persistent effects.
  • Considering the importance of the MSMEs, it was found essential to understand the structural bottlenecks and economic forces affecting the performance of the MSMEs.
  • Towards this end, RBI had announced the constitution of the Committee in December, 2018.


Terms of reference for the committee

  • Review the current institutional framework in place to support the MSME sector.
  • Study the impact of the recent economic reforms on the sector and identify the structural problems affecting its growth.
  • Examine the factors affecting the timely and adequate availability of finance to the sector.
  • Study the global best practices with respect to MSMEs and recommend its adoption in India.


News Summary:

  • The UK Sinha committee has now submitted its report to the RBI, in which it made some important recommendations.
  • The committee recommends doing away with collateral security for loans up to Rs 20 lakh extended to MSMEs – the current ceiling is Rs 10 lakh. It will be extended to borrowers falling under the Mudra scheme, SHGs, and MSMEs.
  • It suggests various long-term solutions for the economic and financial sustainability of MSMEs.
  • The report also mentions mainstreaming the restructuring of stressed loans, considering the central bank had given a one-year window to banks to do so at the beginning of 2019.



  • If the committee’s recommendations are accepted, the loan limit under Mudra will also be doubled, and it will be more beneficial to micro units.
  • However, even though 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.


MUDRA scheme

  • Pradhan Mantri Mudra Yojana (PMMY) is a flagship scheme of the government to “fund the unfunded” by bringing such enterprises to the formal financial system and extending affordable credit to them.
  • It was launched in 2015 and 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.
  • It has three products —Shishu (loans up to Rs 50,000), Kishore (loans above Rs 50,000 and up to Rs 5 lakh) and Tarun (loans above Rs 5 lakh and up to Rs 10 lakh) — to signify the stage of growth, development and funding needs of the beneficiary.

Image result for mudra scheme e

Loan Stats

  • In 2018-19, about 60 million loans worth Rs 3 trillion were sanctioned under Mudra, which was also the target amount.
  • As of Feb 1, 2019, over 157 million loans amounting to Rs 7.59 trillion have been extended by MLIs (member lending institutions) under PMMY.
  • Almost 73 per cent of the loans under the PMMY have been extended to women borrowers.
  • However, loans worth Rs 7,277 crore have turned into bad loans by the end of March 2018, as these were given mostly to first-time borrowers with no credit history.



Changes in the offing

  • According to the earlier definition of MSMEs, 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 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 units will be up to Rs 5 crore of turnover, small units up to Rs 75 crore, and medium units up to Rs 250 crore of turnover.