Introduction to Collateral-Free Loans
Banks will not be violating RBI regulations on loan classification if they take “voluntary pledge” of gold and silver as collateral from borrowers seeking agriculture and micro & small enterprise (MSE) loans up to a collateral-free limit, according to the Central bank. This move is expected to help borrowers who are seeking loans for agriculture and allied activities, as well as micro and small enterprises.
Clarification on Loan Classification
The RBI appears to have issued the aforementioned clarification as there was differing interpretation among its inspection teams regarding classification of loans for agriculture and MSE borrowers, up to the collateral-free limit, involving pledge of gold and silver as collateral. Some of the Central bank inspectors took a view that if gold and silver are pledged as collateral in the case of such loans, then these (loans) cannot be classified as agriculture and MSE loans, respectively, under the priority sector lending (PSL) norm.
Clearing the Air on PSL Norms
The RBI clarification has now settled the issue of loan classification, underscoring that loans against voluntary pledge of gold and silver as collateral by borrowers, sanctioned by the banks up to the collateral free limit, as covered in its Master Directions relating to “Credit Flow to Agriculture – Collateral free agricultural loans” and “Lending to MSME Sector” will not be violating the said directions. The current limit for collateral free agricultural loans, including loans for allied activities, is ₹2 lakh per borrower. This limit was increased from ₹1.6 lakh per borrower in December 2024.
Understanding Priority Sector Lending
Banks are mandated to not accept collateral security in the case of loans up to ₹10 lakh extended to units in the MSE sector. Priority sector loans include loans given to sectors such as agriculture; micro, small & medium enterprises; export credit; education; housing; social infrastructure; renewable energy; and others. Under RBI regulations, 40 per cent of a commercial bank’s loan portfolio should comprise PSL loans.
Key Takeaways
Banking expert V Viswanathan noted that the RBI circular clearly states that its norms will not be violated if banks “voluntarily take” collateral by way of gold/silver in the case of loans up to the collateral free limit for agriculture and MSE borrowers. So, they will continue to get classified under PSL up to the ceiling set for such loans. This means that borrowers will still be able to access loans under the priority sector lending norms, even if they pledge gold or silver as collateral.
Conclusion
In conclusion, the RBI’s clarification on collateral-free loans for agriculture and micro & small enterprises has helped to clear up any confusion surrounding loan classification. Borrowers can now access loans up to the collateral-free limit, with the option to pledge gold or silver as collateral, without affecting the loan’s classification under priority sector lending norms. This move is expected to benefit borrowers in the agriculture and MSE sectors, and help to promote economic growth and development.
