RBI doubles cap on collateral-free loans to Rs 10 lakh to MSEs

MUMBAI: The Reserve Bank on Thursday doubled the limit for collateral-free loans to Rs 10 lakh to the micro and small enterprises (MSEs), providing a major boost to meet their funding requirements.

"Banks are mandated not to accept collateral security in the case of loans up to Rs 10 lakh extended to units in the MSE sector," RBI said in a notification to the chiefs of banks, including regional rural and local area banks.

The decision to hike the cap of collateral-free loans comes following the recommendations of an RBI-constituted working group headed by one of the executive directors of the central bank VK Sharma.

The working group had recommended that "the limit for collateral-free loans to the MSE sector be increased from the present level of Rs 5 lakh to Rs 10 lakh and it be made mandatory for banks".

The RBI said banks, in turn, can take cover for the collateral-free credit facilities under the credit guarantee scheme of the Credit Guarantee Fund Trust for MSEs.

"Banks may also strongly encourage their branch-level functionaries to avail of the CGS cover, including making performance in this regard a criterion in the evaluation of their field staff," the notification said.