Source: BS
Context:
Reserve Bank of India proposes collateral-free loans up to ₹20 lakh for MSMEs
- No mandatory collateral for loans up to ₹20 lakh
- Voluntary collateral allowed in form of gold/silver
- Objective: promote cash-flow-based lending and improve MSME credit access
What is Collateral in Banking?
Collateral refers to any asset pledged by a borrower to secure a loan. It acts as a safety net for lenders in case the borrower fails to repay.
- Common forms of collateral:
- Immovable assets: land, property
- Movable assets: machinery, vehicles
- Financial assets: gold, securities
- Role in lending:
- Reduces default risk for banks
- Acts as a commitment device for borrowers
- Helps banks lend even to borrowers with weak credit history
- Example:
- A small business pledging machinery to obtain a working capital loan
What is Collateral-Based Lending?
Collateral-based lending is a traditional lending model where banks rely heavily on pledged assets rather than only on borrower income.
- Key features:
- Loan approval depends on asset value
- Lower interest rates due to reduced risk
- Widely used in MSME and agriculture sectors
- Limitations:
- Excludes asset-poor but viable businesses
- Leads to financial exclusion
What is Cash-Flow-Based Lending?
Cash-flow-based lending evaluates the borrower’s ability to repay based on income streams, business turnover, and financial records instead of physical assets.
- Key indicators used:
- Bank transaction history
- GST returns
- Digital payments data
- Advantages:
- Promotes financial inclusion
- Supports startups and small firms without assets
- Challenges:
- Requires strong data systems
- Difficult in informal sectors
Important for which Exam?
RBI Grade B
- Phase 1: Banking awareness, MSME credit
- Phase 2:
- ESI: Financial inclusion, credit markets
- FM: Risk management, lending models
NABARD Grade A/B
- Phase 1:
- ESI: Financial inclusion
- ARD: Rural credit
- Phase 2:
- ESI: MSME financing issues
- ARD: Rural enterprise credit
MCQs
Q.1) What is collateral in banking?
[1] Interest rate
[2] Asset pledged against loan
[3] Tax paid
[4] Insurance premium
Q.2) What is the main aim of RBI’s proposal?
[1] Increase exports
[2] Promote cash-flow-based lending
[3] Reduce inflation
[4] Increase taxes
Q.3) What is moral hazard?
[1] Risk before loan
[2] Risk after loan disbursement
[3] Tax evasion
[4] Inflation rise
Q.4) What is SARFAESI related to?
[1] Tax collection
[2] Loan recovery
[3] Trade policy
[4] Agriculture
ANSWERS
1 → [2]
2 → [2]
3 → [2]
4 → [2]
