Previous Year Question
Consider the following statements with reference to India:
According to the ‘Micro, Small and Medium Enterprises Development (MSMED) Act, 2006’, the ‘medium enterprises’ are those with investments in plant and machinery between ₹15 crore and ₹25 crore.
All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector.
Which of the statements given above is/are correct?
Only 1
Only 2
Both 1 and 2
Neither 1 nor 2
Correct Answer: B
Detailed Solution
Statement 1 is incorrect.
Under the MSMED Act, 2006, the classification of enterprises may be revised from time to time through a government notification. The classification applicable in 2023 was based on the composite criteria of investment and annual turnover.
MSME classification applicable in 2023
Enterprise | Maximum investment in plant and machinery or equipment | Maximum annual turnover |
Micro Enterprise | ₹1 crore | ₹5 crore |
Small Enterprise | ₹10 crore | ₹50 crore |
Medium Enterprise | ₹50 crore | ₹250 crore |
Both conditions were applied together. If an enterprise crossed even one of the investment or turnover limits prescribed for its category, it moved to the next category.
Therefore, in 2023, a medium enterprise was not identified through an investment range of ₹15 crore to ₹25 crore. The maximum investment limit for a medium enterprise was ₹50 crore and its maximum turnover limit was ₹250 crore.
The statement does not correspond to the original older classification either. Under the earlier manufacturing-enterprise classification of the MSMED Act, 2006, a medium enterprise had an investment in plant and machinery exceeding ₹5 crore but not exceeding ₹10 crore. Therefore, the ₹15-25 crore range does not correspond to either applicable classification.
Current fact: With effect from 1 April 2025, the revised classification increased the investment limit for a medium enterprise to ₹125 crore and the turnover limit to ₹500 crore. However, this 2023 question must be answered according to the limits applicable at that time—₹50 crore and ₹250 crore.
Statement 2 is correct.
The RBI’s Priority Sector Lending Directions expressly provide that all bank loans to MSMEs, subject to the prescribed MSME definition and regulatory conditions, qualify for classification under Priority Sector Lending.
The inclusion of MSMEs in the priority sector seeks to:
improve access of small enterprises to institutional credit;
make formal banking finance available to them;
promote production, employment and entrepreneurship;
reduce dependence on informal sources of credit; and
improve access to working capital and term loans.
The expression “qualify under the priority sector” does not mean that every MSME has an automatic right to receive a loan or that every loan must carry a subsidised interest rate. It means that an eligible bank loan given to an MSME can be counted towards the bank’s Priority Sector Lending achievement under RBI rules.
Under the general Priority Sector targets applicable to Domestic Commercial Banks, the total Priority Sector Lending target was generally 40% of Adjusted Net Bank Credit or Credit Equivalent of Off-Balance Sheet Exposure, whichever was higher. A separate 7.5% sub-target was prescribed for Micro Enterprises.