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PM Mudra Yojana – RBI to Raise Collateral Free Loans Limit to Rs. 20 Lakh

Reserve Bank of India (RBI) committee headed by UK Sinha has given its proposal to double the limit on collateral free loans under Mudra Yojana from Rs. 10 lakh to Rs. 20 lakh. This proposal by MSME Panel on Mudra Yojana aims at helping self-help groups (SHGs) and borrowers that fall in the Mudra scheme’s micro, small and medium enterprises (MSMEs) category.

UK Sinha (former chairman of Securities and Exchange Board of India (SEBI)) committee report reviewed the current framework of the MSME sector. The new report on PM Mudra Yojana is going to be made public by RBI on 21 June 2019. The report focuses on giving long-term solutions for the economic and financial stability of the MSMEs.

MSME sector in India accounts for around 7% of India’s GDP and employs around 117 million people. So to boost MSME sector, RBI can raise collateral free Mudra Loans limit to Rs. 20 lakh.

PM Mudra Yojana – Collateral Free Loans upto Rs. 20 Lakh

Pradhan Mantri Mudra Yojana (PPMY) was launched by Prime Minister Narendra Modi with an aim to provide easy loans to non-corporate, non-farm small and micro-enterprises. The Mudra loans are provided to manufacturing, trading and service sectors by banks and non-banking financial companies as working capital. Now there could be some good news for over 63 million MSMEs in the days ahead. RBI committee is going to do away with collateral security for loans upto Rs. 20 lakh extended to units in this sector.

The current ceiling is Rs. 10 lakh as notified in regulator’s 1 July 2010 circular. As per PM Mudra Yojana, the lending target of Rs. 3 trillion was achieved by the government in 2018-19. The Mudra Yojana amount was structured by providing funds to 60 million different sectors.

As on 1 Feb 2019, over 15.73 cr loans amounting to Rs. 7.59 trillion have been extended by member lending institutions (MLIs) under the PMMY. Around 73% of loans under PM Mudra Yojana has been extended to women borrowers. There were drawbacks in Mudra Yojana because of loans sanctioned to 1st time borrowers without credit history which led to loss of about Rs. 7277.31 cr in 2018.

UK Sinha Committee Proposals on PM Mudra Yojana

A committee was formed under the chairmanship of former Securities and Exchange Board of India chairman UK Sinha in January 2019. This RBI Panel on MSMEs was setup to suggest long-term measures for the economic and financial sustainability of the MSME sector. The proposal on Pradhan Mantri Mudra Yojana focuses on categorising the MSMEs on the basis of their annual turnover rather than their investment size.

UK Sinha Committee also stated that the micro-based sector can have an annual turnover of Rs. 5 cr, small sector upto Rs. 75 cr and medium sector up to Rs. 250 cr turnover.

RBI Panel on MSMEs – Bad Debt Problem on Loans under Mudra Yojana

The loans under PM Mudra Yojana are covered under the Credit Guarantee for Micro Units. The newly proposed cap by RBI Panel on MSMEs is Rs. 20 lakhs which might push the number of bad loans higher than normal in case the definition of MSME also changes.

After the implementation of new proposals in Mudra Yojana, there might be massive bad debts if micro-units are given loans with reference to their turnover. These bad debts might also get reflected in the other sector units, resulting in the failure of the Mudra Yojana. The persisting bad debts can create a negative impact on banks due to which bankers might restrain themselves from more funding unless the insurance cover is commensurately increased.