Relevance: GS III (Indian Economy – Banking & Inclusive Growth) | Source: The Hindu / RBI Notification

1. The Policy Shift: From ₹10L to ₹20L

To boost the Micro, Small, and Medium Enterprises (MSME) sector, the Reserve Bank of India (RBI) has doubled the limit for collateral-free loans.

  • The Change: The limit has been raised from ₹10 lakh to ₹20 lakh.
  • Target Group: This benefit is specifically for Micro and Small Enterprises (MSEs), which often struggle to provide assets (land/property) as security for bank loans.

2. Conceptual Shift: Asset vs. Cash-Flow

This move encourages a fundamental shift in banking philosophy:

  • Old Model (Asset-Based): Banks lent money based on Collateral (how much land/gold the borrower owns).
  • New Model (Cash-Flow Based): By removing the collateral requirement up to ₹20 lakh, banks are forced to assess a borrower based on Business Viability and Cash Flows (daily income). This reduces the dependence of small businesses on informal moneylenders.

3. Secondary Move: Boosting Real Estate

In a parallel decision to improve liquidity, the RBI has permitted banks to lend to Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

  • Impact: This opens a new credit channel for the real estate and infrastructure sectors, which previously relied heavily on equity or external commercial borrowings.

UPSC Value Box

Concept / Scheme

Relevance for Prelims

CGTMSECredit Guarantee Fund Trust for Micro and Small Enterprises. When banks give collateral-free loans, the risk of default is covered by this trust (set up by GOI and SIDBI).
REITsReal Estate Investment Trusts. These are companies that own or finance income-producing real estate (like malls/offices). They allow small investors to invest in real estate like they invest in shares.
Priority Sector Lending (PSL)Lending to MSMEs is part of the mandatory PSL targets for banks. Increasing the loan limit helps banks achieve these targets faster.

Q. With reference to the Micro, Small and Medium Enterprises (MSME) sector in India, consider the following statements:

  1. The Reserve Bank of India has mandated that all loans to MSMEs must be collateral-free up to ₹50 lakh.
  2. The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) provides a guarantee cover to banks for collateral-free loans extended to MSMEs.
  3. Real Estate Investment Trusts (REITs) are strictly prohibited from borrowing funds from commercial banks.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) 2 and 3 only

(d) 1 and 3 only

Correct Answer: (b)

Share This Story, Choose Your Platform!

Recent Posts

Start Yours at Ajmal IAS – with Mentorship StrategyDisciplineClarityResults that Drives Success

Your dream deserves this moment — begin it here.