RBI asks banks to ensure collateral-free loans of up to Rs5 lakh to tiny units

Banks, including RRBs, must not obtain collateral security in the case of loans up to Rs5 lakh extended to all units of the micro and small enterprises sector, the Reserve Bank of India said in a clarification issued today.

These are mandatory instructions, RBI clarified following a spate of enquiries as to whether these guidelines are advisory or mandatory in nature.

"You are requested to issue suitable instructions to your branches/controlling offices for meticulous and strict compliance in this regard," RBI said in a circular issued to banks.

RBI had also notified the extension of collateral-free loans of up to Rs5 lakh to the units of MSE sector (both manufacturing and service enterprises) on 20 January 2009.

A high level committee headed by SL Kapur had suggested measures for improving the delivery system and simplification of procedures for credit to the SSI sector as far back as 1999.

The committee had, inter alia, recommended that the exemption limit for collateral security/third party guarantee be raised from Rs25,000 to Rs1 lakh. Accordingly instructions were issued to banks on 5 October 1999 raising the limits from Rs25,000 to Rs1 lakh.