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Indian banks can not ask for collateral security for loans upto Rs 5 lakh to Micro and Small Enterprises (MSE) sector

On September 21, 2007 banks were advised,by Reserve bank of India, that they may extend collateral-free loans upto Rs. 5 lakh, to all new loans sanctioned to the units of MSE sector (both manufacturing and services enterprises) as defined under MSMED Act, 2006.

Notwithstanding the above, RBI has received representations from various quarters that collateral security is being demanded from MSEs even for new loans upto Rs. 5 lakh.

Reserve Bank of India has reiterated on January 20, 2009 that banks may extend collateral-free loans upto Rs. 5 lakh to all new loans to the MSE sector (both manufacturing and service enterprises).

RBI has clarified that these guidelines are mandatory and banks must not obtain collateral security in the case of loans upto Rs. 5 lakh extended to all units of the MSE sector.

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