RBI ups limit for collateral-free loans to small units to Rs10 lakh

The Reserve Bank of India (RBI) today announced a 100 per cent increase in the ceiling on collateral-free loans to micro and small enterprises (MSEs) to Rs10 lakh from the existing Rs5 lakh. 

"The limit for collateral free loans to the MSE sector be increased from the present level of Rs5 lakh to Rs10 lakh and it be made mandatory for banks," RBI said in a notification to banks.

RBI said banks, in turn, can take cover for the collateral free credit facilities under CGS.

The RBI decision is based on the recommendations of a working group constituted by it to review the credit guarantee scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small Enterprises. The group headed by RBI executive director V K Sharma, had submitted its report, which was released on 6 March 2010.

RBI said in order to upscale the CGS, it is necessary to create widespread awareness about the key features and benefits of the scheme and suggested that branch CEOs of banks take charge of the CGS operations.

"As the branch level functionaries have a predilection to lend against collaterals, the group recommends that the chief executive officers (CEOs) of banks assume complete and total ownership in the matter of strongly encouraging the branch level functionaries to avail of the CGS cover, including making performance in this regard a criterion in the evaluation of their field staff," RBI said.

RBI said it has accepted the group's recommendations and has made it mandatory for banks not to accept collateral security in the case of loans up to Rs10 lakh extended to units in the MSE sector.

It has asked banks to 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.