UPSC Prelims Practice Questions — RBI tells banks not to insist on collateral for loans to MSMEs

Q1. Under which one of the following statutory provisions has the Reserve Bank of India issued the Lending to Micro, Small & Medium Enterprises (MSME) Sector (Amendment) Directions, 2026?

  • A. Sections 45L and 45N of the Reserve Bank of India Act, 1934
  • B. Sections 21 and 35A of the Banking Regulation Act, 1949
  • C. Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006
  • D. Section 10B of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970

Q2. With reference to the RBI's Lending to MSME Sector (Amendment) Directions, 2026, consider the following statements: 1. The mandatory collateral-free loan ceiling for MSE units has been raised from ₹10 lakh to ₹20 lakh. 2. Banks may, at their discretion and based on borrower track record, extend the collateral-free limit up to ₹25 lakh. 3. Units financed under the Prime Minister Employment Generation Programme are entitled to collateral-free loans up to ₹20 lakh. 4. The enhanced collateral-free ceiling applies only to MSEs in the manufacturing sector and not to the services sector. Which of the statements given above is/are NOT correct?

  1. The mandatory collateral-free loan ceiling for MSE units has been raised from ₹10 lakh to ₹20 lakh.
  2. Banks may, at their discretion and based on borrower track record, extend the collateral-free limit up to ₹25 lakh.
  3. Units financed under the Prime Minister Employment Generation Programme are entitled to collateral-free loans up to ₹20 lakh.
  4. The enhanced collateral-free ceiling applies only to MSEs in the manufacturing sector and not to the services sector.
  • A. 1 and 2 only
  • B. 3 only
  • C. 4 only
  • D. 2 and 4 only

Q3. Which one of the following committees was the first to recommend raising the mandatory collateral-free lending ceiling for the MSE sector to ₹20 lakh, a recommendation that the RBI has now operationalised in 2026?

  • A. Nayak Committee on Working Capital to Small Scale Industries (1992)
  • B. Narasimham Committee on Financial System (1991)
  • C. RBI Expert Committee on MSMEs chaired by U.K. Sinha (2019)
  • D. Raghuram Rajan Committee on Financial Sector Reforms (2008)

Q4. In the context of the RBI's directions on lending to the MSME sector, the term 'collateral security' refers to:

  • A. The primary asset created out of the bank finance and hypothecated to the lending bank
  • B. An asset, distinct from the primary asset financed by the loan, that is pledged additionally to secure repayment
  • C. A personal guarantee furnished by a third party in lieu of any tangible asset
  • D. The margin money contributed by the borrower at the time of sanction of the loan

Q5. The Prime Minister Employment Generation Programme (PMEGP), whose units have been brought under the enhanced ₹20 lakh collateral-free lending norm by the RBI in 2026, is implemented at the national level by which one of the following?

  • A. Small Industries Development Bank of India (SIDBI)
  • B. National Small Industries Corporation (NSIC)
  • C. Khadi and Village Industries Commission (KVIC)
  • D. Development Commissioner (MSME), Ministry of MSME