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 Rs. 15 crore and Rs. 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?
Contents15
- A1 Only
- B2 Only
- CBoth 1 and 2
- DNeither 1 nor 2
Show answer
Answer: (B) 2 Only
Statement 1 is incorrect:
The investment limits mentioned in the statement are outdated and incorrect. (as announced in the Atmnirbhar Bharat package on 13th May, 2020)
After the revision of MSME definitions in 2020, a medium enterprise is defined as one with:
- investment in plant and machinery or equipment up to ₹50 crore, and
- turnover up to ₹250 crore.
Therefore, the statement that medium enterprises are those with investments between ₹15 crore and ₹25 crore is incorrect.
Statement 2 is correct:
Under the Priority Sector Lending (PSL) guidelines of the RBI, bank loans provided to eligible Micro, Small and Medium Enterprises (MSMEs) qualify under the priority sector.
Thus, loans to MSMEs are included within priority sector lending norms.
Therefore:
- Statement 1 is incorrect.
- Statement 2 is correct.
Hence, the correct answer is 2 only.
MSME definitions were revised in 2020 to increase investment limits and add turnover criteria, making the old 2006 Act definitions outdated.
The government revised MSME definitions in 2020 during COVID-19 to help more businesses qualify for MSME benefits and easier credit access.
UPSC is testing whether students know the current MSME classification versus the original 2006 Act definitions.
MSME Classification & Investment Limits
Indian Economy MSMED Act medium enterprises plant and machinery Rs. 15 crore Rs. 25 crore
MSME Classification: 2020 Revised Criteria & Investment Limits
2020 revision replaced investment-only criteria with composite criteria (investment + turnover)
Medium enterprises: investment up to ₹50 crore AND turnover up to ₹250 crore
Manufacturing vs Services distinction was removed in 2020
Both criteria must be satisfied simultaneously
Key Change in 2020
The MSMED Act 2006 was revised in 2020 to introduce composite criteria combining both investment and turnover limits. The old system had separate definitions for manufacturing and services, creating confusion.
Current MSME Classification (2020)
Category | Investment Limit | Turnover Limit | Both Must Be Satisfied |
|---|---|---|---|
Micro | Up to ₹1 crore | Up to ₹5 crore | ✓ |
Small | Up to ₹10 crore | Up to ₹50 crore | ✓ |
Medium | Up to ₹50 crore | Up to ₹250 crore | ✓ |
Old vs New System
Aspect | Old System (Pre-2020) | New System (2020) |
|---|---|---|
Criteria | Investment only | Investment + Turnover |
Manufacturing vs Services | Separate limits | Unified limits |
Medium Enterprise Investment | ₹5-10 crore (Mfg), ₹2-5 crore (Services) | Up to ₹50 crore |
Turnover Consideration | Not considered | Mandatory criterion |
Question Analysis
Statement 1 trap: Uses old investment range (₹15-25 crore) which never existed in any MSME classification
Current reality: Medium enterprises can invest up to ₹50 crore (5x higher than statement)
Turnover ignored: Statement mentions only investment, but 2020 rules require both criteria
Trap: Statement uses ₹15-25 crore range which never existed in MSME classification
Confusion: Old system had different limits for manufacturing vs services — 2020 unified them
Missing criterion: Questions may mention only investment but turnover is equally important post-2020
Date confusion: 2020 revision is recent — many still remember old investment-only criteria
Priority Sector Lending to MSMEs
Indian Economy bank loans Priority sector Micro, Small and Medium Enterprises
Priority Sector Lending: MSME Coverage & Bank Obligations
Not all MSME loans qualify for priority sector — only loans up to ₹7.5 crore
Banks must lend 18% of ANBC to MSMEs under priority sector
₹7.5 crore limit applies to both manufacturing and service MSMEs
Loans above ₹7.5 crore to MSMEs are regular commercial loans
Core Concept
Priority Sector Lending (PSL) mandates banks to lend a minimum percentage to specified sectors. For MSMEs, there's a ₹7.5 crore ceiling — loans beyond this amount don't count toward PSL targets even if given to valid MSMEs.
PSL Targets for Banks
Sector | Domestic Banks Target | Foreign Banks Target | Loan Limit for PSL |
|---|---|---|---|
Total PSL | 40% of ANBC | 32% of ANBC | Various limits apply |
MSMEs | 7.5% of ANBC | 7.5% of ANBC | Up to ₹7.5 crore |
Micro Enterprises | 7.5% of ANBC (within MSME) | 7.5% of ANBC | Up to ₹10 lakh |
Agriculture | 18% of ANBC | No separate target | Up to ₹2 crore |
Why Statement 2 is Wrong
₹7.5 crore ceiling: Medium enterprises can get loans up to ₹50+ crore, but only ₹7.5 crore qualifies for PSL
Large MSME loans excluded: A ₹20 crore loan to a medium enterprise won't count toward bank's PSL target
ANBC definition: Adjusted Net Bank Credit excludes investments in bonds, CDs, and other instruments
PSL Qualification Process
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Bank gives loan to MSME**
Loan can be of any amount`"]
s2["`**Check loan amount**
Is it ₹7.5 crore or below?`"]
s3["`**If ≤₹7.5 crore**
Qualifies for PSL target calculation`"]
s4["`**If >₹7.5 crore**
Treated as regular commercial loan`"]
s5["`**Bank reports PSL achievement**
Only qualifying portion counts toward 7.5% target`"]
s1 --> s2
s2 --> s3
s3 --> s4
s4 --> s5Trap: 'All bank loans to MSMEs' — the word 'All' makes it wrong due to ₹7.5 crore limit
Size confusion: Medium enterprises can be large businesses — their loans may exceed PSL limits
Target vs Reality: Banks must achieve 7.5% MSME lending, but not every MSME loan counts
Recent change: ₹7.5 crore limit was revised upward — older limits were lower
MSMED Act 2006 & Policy Framework
Indian Economy MSMED Act, 2006
MSMED Act 2006: Framework, Provisions & Recent Updates
MSMED Act 2006 provides statutory framework for MSME definition and support
Delayed payment provisions — buyers must pay MSMEs within 45 days
Udyam Registration replaced earlier registration systems in 2020
Act covers promotion, development and competitiveness of MSMEs
Legislative Framework
The Micro, Small and Medium Enterprises Development Act, 2006 created India's first comprehensive legal framework for MSMEs. It replaced the Small Industries Development Act 1951 and brought services under formal MSME definition.
Key Provisions of MSMED Act
Provision | Details | Impact |
|---|---|---|
Definition | Legal classification of MSMEs | Enables targeted policies |
Registration | Udyam Registration (online, free) | Single window for benefits |
Delayed Payments | 45-day payment rule + interest | Protects MSME cash flow |
Credit Guarantee | CGTMSE coverage up to ₹2 crore | Collateral-free lending |
Reservation | Items reserved for MSME production | Market protection |
Major Amendments & Updates
2018: Delayed payment period reduced from 90 to 45 days
2020: New composite criteria (investment + turnover) introduced
2020: Udyam Registration replaced EM-I and EM-II systems
Services inclusion: Act brought services sector under MSME ambit for first time
MSME Support Ecosystem
# MSMED Act 2006
## Financial Support
- PSL targets
- CGTMSE
- MUDRA loans
- SIDBI refinance
## Registration
- Udyam portal
- Aadhaar-based
- Free process
- Single window
## Market Access
- Govt procurement
- GeM portal
- Reservation policy
- Cluster development
## Legal Protection
- Delayed payment act
- Interest on delays
- MSME tribunals
- Dispute resolutionYear confusion: Act is 2006 but major revisions happened in 2018 and 2020
Payment period: Now 45 days (was 90 days earlier) — questions may use old timeframe
Registration names: Udyam (current) vs EM-I/EM-II (old) — know the transition
Services coverage: Act covers both manufacturing and services — wasn't always the case