RBI Policy Change on MSME Financing

Industry Issues

• Problem Statement
  • Industry associations for micro small and medium enterprises MSMEs have sought the Reserve Bank of India (RBI) to treat credit availed by banks to nonbanking financial companies (NBFCs) for on lending to MSMEs as priority sector lending (PSL).
• Ceiling on Borrowing
  • They have also demanded that RBI must remove or at least raise the present 20 lakh borrowing ceiling of each MSME to at least 1 crore.

Background History of RBIs Policy

• 2011
  • With effect from April 1, 2011, RBI withdrew its decision of treating the loans given by NBFCs to MSEs as on-lending as part of the Priority Sector Lending. Thus funding for MSEs became much more less.
• Impact on NBFCs
  • The withdrawal of funds by banks has brought financial hardship for most of the NBFCs, which had, in the past, provided working capital to MSMEs.

Priority Sector Lending (PSL) Classification for NBFCs

• Renovation of PSL Categorisation
  • RBI revamped PSL categorisation partly but only in loan up to 20 lakh per borrower only.
• Liquidity Crisis
  • The said partial revamping has also failed to mitigate the increasing MSEs funding needs due to restrictions under the capping that constrict the opportunities for NBFCs to fully help MSEs again.

Priority Sector Lending (PSL) for Scheduled Commercial Banks (SCBs)

• PSL Expansion
  • By March 31 2024, PSL was 451 of adjusted net bank credit of SCBs PSL exceeded the 40 target set for FY24.
• YoY Growth
  • YoY growth in PSL during FY24 was at 169 higher than 108 recorded during FY23. The private sector bank and public sector bank grew at 235 and 123 respectively.

Non Performing Assets in Priority Sector Lending (PSL)

• PSL NPAs
  • Gross NPA ratio for PSL was reduced to 44 in March 2024 from 54 in March 2023.
• Priority Sector NPAs
  • The absolute NPAs have declined. However the share of priority sector NPAs of the overall NPA of SCBs has increased to 573 mainly due to agricultural slippages.

MSME Investment and Turnover Limits

• Micro enterprises
  • Investment in plant and machinery / equipment Rs 1 crore turnover Rs 5 crore.
• Small enterprises
  • Investment in plant and machineryequipment 10 crore turnover 50 crore.
• Medium enterprises
  • Investment in plant and machinery equipment 50 crore turnover 250 crore.