UPSC Prelims 2023 Q71: MSME Definition & Priority Sector Lending
Consider the following statements with reference to India:
1. 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.
2. All bank loans to the Micro, Small and Medium Enterprises qualify under the priority sector.
Which of the statements given above is/are correct?
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2
Answer: (b) 2 only
Statement-wise explanation
- 1: incorrect — Section 7 of the MSMED Act, 2006 originally defined a medium manufacturing enterprise as one with plant and machinery investment of more than ₹5 crore but not more than ₹10 crore. For service enterprises, the equipment range was more than ₹2 crore up to ₹5 crore. From 1 July 2020 the government notified composite limits: a medium enterprise could have investment up to ₹50 crore and turnover up to ₹250 crore. From 1 April 2025 these were raised to ₹125 crore and ₹500 crore. No version of the definition has ever used a ₹15–25 crore band.
- 2: correct — RBI's Master Directions on Priority Sector Lending say: 'All bank loans to MSMEs shall qualify for classification under priority sector lending.' The only condition is that the borrower must meet the MSME definition notified under the MSMED Act, as updated from time to time. Separately, banks must lend 7.5% of ANBC or CEOBSE (whichever is higher) to micro enterprises. That sub-target sits inside the overall 40% priority sector target for domestic commercial banks.
- 3: incorrect — This line is not part of the question. It is ignored.
How to eliminate
Statement 1 gives exact numbers, so you can only settle it if you know the definition. Still, one check works without perfect recall. Every revision has used round ceilings that grow from tier to tier: ₹5–10 crore in 2006, then ₹10–50 crore in 2020, then ₹25–125 crore in 2025. A ₹15–25 crore band does not fit any of these. Statement 2 uses the word 'All', which usually makes aspirants suspicious. Here, though, it is the actual wording of the RBI Master Directions. MSME lending is one of the clearest priority sector categories, unlike housing or education loans, which qualify only up to set ceilings. Facts to remember: (i) the current MSME limits are composite (investment plus turnover), and for medium enterprises they are ₹125 crore investment and ₹500 crore turnover from 1 April 2025; (ii) RBI rule: all bank loans to MSMEs qualify as priority sector lending.
Know more
How India defines MSMEs
The MSMED Act, 2006 first classified enterprises by investment only. It used separate tables for manufacturing (plant and machinery) and services (equipment). Section 7 lets the Centre revise these limits by notification. Since 2020 every revision has been made this way, not by amending the Act.
| Category | 2006 Act (manufacturing) | From 1 July 2020 (investment / turnover) | From 1 April 2025 (investment / turnover) |
|---|---|---|---|
| Micro | ≤ ₹25 lakh | ≤ ₹1 cr / ≤ ₹5 cr | ≤ ₹2.5 cr / ≤ ₹10 cr |
| Small | ₹25 lakh – ₹5 cr | ≤ ₹10 cr / ≤ ₹50 cr | ≤ ₹25 cr / ≤ ₹100 cr |
| Medium | ₹5 cr – ₹10 cr | ≤ ₹50 cr / ≤ ₹250 cr | ≤ ₹125 cr / ≤ ₹500 cr |
Key features of the post-2020 system:
- Composite test: an enterprise must meet both the investment limit and the turnover limit. If it crosses either one, it moves up a category.
- One definition for manufacturing and services. The old separate tables are gone.
- Export turnover is excluded when calculating turnover, so firms are not penalised for exporting.
- Registration happens on the Udyam Registration Portal.
Link to priority sector lending (PSL)
RBI requires domestic commercial banks to lend 40% of Adjusted Net Bank Credit (ANBC) to priority sectors. All bank loans to MSMEs count towards this. A 7.5% sub-target for micro enterprises makes sure the smallest units are not crowded out. When the MSME definition is widened, more borrowers become eligible for PSL. Banks that miss their targets can buy Priority Sector Lending Certificates (PSLCs) from banks that exceed theirs.
In the news
In June 2020, the government revised the MSME definition under the Aatmanirbhar Bharat package. It moved to composite investment-plus-turnover limits and stopped treating manufacturing and services separately. RBI then aligned its priority sector rules with the new definition. Between 2020 and 2023 there were repeated follow-up changes, such as Udyam registration and reclassification rules, which kept the MSME definition in the news before the 2023 Prelims.
NCERT Concepts to Revise
- MSME classification: Statement 1 depends on the exact investment and turnover limits that place an enterprise in the medium category.
- Micro, small and medium enterprises: Explains the two-part test (investment and turnover) that now defines micro, small and medium enterprises, replacing the 2006 investment-only test.
- Priority sector lending: Statement 2 asks whether MSME loans count towards the share of credit RBI requires banks to give to priority sectors.
- Priority Sector Lending Certificates: Shows how banks that fall short of priority sector targets, including MSME sub-targets, make up the gap.
- Small-scale industry: The older SSI concept with an investment ceiling explains where the investment-only MSME definition came from.
Read more
- Industrial Policy, Public Sector, MSMEs and Disinvestment
- From SSI to MSME: Karve Committee, reservation and shifting definitions
- Directed lending: priority sector targets, PSLCs and co-lending
- Limits of investment and turnover for classification of Micro, Small and Medium Enterprises (MSMEs) revised to enable higher efficiencies of scale, encourage technological up-gradation, better access to capital and enhan...