Reserve Bank of IndiaReuters

A Reserve Bank of India committee has proposed to double the cap on collateral-free Mudra loan from Rs 10 lakh to Rs 20 lakh. The proposal aims at helping self-help groups and borrowers that fall in the Mudra scheme's micro, small and medium enterprises (MSMEs) category.

The RBI panel was headed by UK Sinha, former chairman of Securities and Exchange Board of India (SEBI). The report reviewed the current framework of the MSME sector and will be made public by RBI on Friday. The report focuses on giving long-term solutions for the economic and financial stability of the MSMEs.

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The proposal focuses on categorising the MSMEs on the basis of their annual turnover rather than their investment size. It also states that the micro-based sector can have an annual turnover of Rs 5 crore, small sector up to Rs 75 crore and medium sector up to Rs 250 crore turnover.

The 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 loans are provided to the manufacturing, trading and service sectors by banks and non-banking financial companies as working capital.

As per the Mudra Yojana, the lending target of Rs 3 trillion was achieved by the government in 2018-19. The amount was structured by providing funds to 60 million different sectors.

"As on February 1, 2019, over 15.73 crore loans amounting to Rs 7.59 trillion have been extended by MLIs (member lending institutions) under the PMMY, since the inception of the scheme. Almost 73 percent of the loans under the PMMY has been extended to women borrowers," said Shiv Pratap Shukla, former minister of state for finance. He added that there were drawbacks in the schemes because of the loans sanctioned to the first-time borrowers without a credit history which led to a loss of about Rs 7277.31 crore in 2018.

Bad debt problem

The loans under Mudra are covered under the Credit Guarantee for Micro Units. The newly proposed cap of rupees 20 lakhs might push the number of bad loans higher than normal if the definition of MSME also changes.

There might be massive bad debts if micro-units are given loans with reference to their turnover. The bad debts might also be reflected in the other sector units, resulting in the failure of the Mundra Yojana. The persisting bad debts might also create a negative impact on banks because of which the bankers might restrain themselves from more funding unless the insurance cover is commensurately increased.