The Reserve Bank of India (RBI) has instructed all banks that they must not ask for collateral security from the units in the Micro and Small Enterprises (MSEs) sector in case their applications for loans is up to Rs 5 lakh.

The apex bank has made it amply clear that its circular of January 9 this year in this connection is mandatory in nature, not advisory. This applies in the case of MSE sector, both manufacturing and service enterprises, as defined under the MSMED Act, 2006.

“We have received enquiries as to whether these guidelines are advisory or mandatory in nature. It is clarified that these guidelines are mandatory and banks must not obtain collateral security in the case of loans up to Rs 5 lakh extended to all units of the MSE sector,” said an RBI directive issued early this week.

The RBI has directed banks to issue suitable instructions to their branches and controlling offices for “meticulous and strict compliance” in this regard. It may be recalled that the RBI has appointed a high level committee to suggest measures for improving the credit delivery system and simplification of procedures for credit to the SSI sector. The committee chaired by S L Kapur had recommended that the exemption limit be raised to Rs 1 lakh.

This limit was raised further to Rs 5 lakh for the tiny sector in March 2000 and the benefit was later extended to all SSI units in January 2002. In September 2007, banks were advised that they

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