Banks flouting Rs 1 cr collateral-free loan norm for micro, small units

Banks continue to insist on collateral from micro, small and medium enterprises (MSMEs) despite clear provisions for providing collateral-free loans to MSMEs of up to Rs 1 crore, even as the demand for raising the limit to Rs 5 crore has come up at RBI-sponsored town hall meetings with industry associations, Knowledge & News Network - a media platform for MSMEs - reported in its latest fortnightly e-newsletter.

RBI officials recently met officials of the Federation of Indian Micro, Small and Medium Enterprises (FISME) and public and private sector banks to discuss issues faced by MSMEs with banks.

One major point that emerged from the discussions was the lack of awareness of the RBI directive that loans to MSMEs of up to Rs 1 crore should be collateral-free, and the need to raise this limit.

"About 18 per cent of MSMEs are not aware of collateral-free MSME loans," the RBI said. It also said, "The banks invariably insist on collateral security in spite of clear provisions for collateral-free loans up to an amount of Rs 1 crore."

The limit of Rs 1 crore for collateral-free loans needs to be upgradaded to at least Rs 5 crore, entrepreneurs stressed in the town hall meetings. They also pointed out that finance needs to be made available more easily to MSMEs, and at lower rates of interest.

"Banks are to be advised to shorten the process of sanctioning and disbursal of loans and documentation be made easier," RBI said in its agenda for the meetings.

About 40 per cent of MSMEs had no knowledge about government schemes promoting the sector, the apex bank said, emphasising the need to open MSME-specific branches in all industrial areas.

In order to increase credit to micro and small enterprises (MSEs), it is necessary to open more micro accounts.

According to RBI, in an earlier meeting of the Empowered Committee on MSMEs, it was decided that every branch of the bank should open at least five micro accounts in a quarter. "It is observed that some banks have very few new micro accounts despite having significant branch presence," RBI said.

Banks were also doing little to rehabilitate sick MSE units, RBI said. The amount involved in sick MSE units as on March 31, 2014 is 3.09 per cent of total MSE credit, as against 2.49 per cent as on December 31, 2013, according to the central bank's data.