MSME classification and priority sector lending UPSC Prelims PYQ 2023

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?

1 only
2 only
Both 1 and 2
Neither 1 nor 2

Explanation

Statement 1 is incorrect

MSME classification was revised in 2020 under the Atmanirbhar Bharat package, replacing the earlier investment-only criteria of the MSMED Act, 2006. As per the revised criteria, Medium enterprises are those with: Investment in plant and machinery/equipment up to ₹50 crore, and Annual turnover up to ₹250 crore.
Note: New MSME classification criteria announced in Union Budget 2025-26.

Table showing new MSME classification criteria from Union Budget 2025, comparing current and revised investment and turnover limits for micro, small, and medium enterprises. Key updates include increased investment limits from ₹1 crore to ₹2.5 crore for micro, ₹10 crore to ₹25 crore for small, and ₹50 crore to ₹125 crore for medium enterprises, alongside turnover limits doubling across categories

Statement 2 is correct

In terms of Master Direction on ‘Priority Sector Lending (PSL) – Targets and Classification’ dated September 4, 2020, all bank loans to MSMEs conforming to the conditions prescribed in Master Direction on ‘Priority Sector Lending (PSL) qualify for classification under priority sector lending.

Additional Information

Priority Sector Lending refers to the mandatory lending targets set by the Reserve Bank of India (RBI) for banks and financial institutions to ensure that certain sectors of the economy receive adequate credit and financial support.
The objective of priority sector lending is to promote inclusive growth, reduce regional imbalances, and support marginalized sections of society.
According to the RBI’s Master Direction on PSL, the central bank had identified agriculture, MSMEs, export credit, education, housing, social infrastructure, renewable energy, and others as priority sectors based on their social and economic significance.
Under the PSL guidelines, banks are required to allocate a specified percentage of their total lending to these priority sectors.
Currently, for domestic commercial and foreign banks with 20 branches and above, the overall PSL target is set at 40 per cent of their total adjusted net bank credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposures (CEOBE).
For regional rural banks and small finance banks, the total PSL target is 75 per cent of ANBC or CEOBE whichever is higher.
In case, banks fail to meet their PSL targets, they have to deposit the allocated amount to the Rural Infrastructure Development Fund (RIDF) established with NABARD and to other funds with NABARD, SIDBI, Mudra, National Housing Bank, etc., as decided by the RBI from time to time, according to the RBI’s master direction on PSL.