The Reserve Bank of India (RBI) has decided to raise the limit for collateral-free agriculture loans from Rs 1.6 lakh to Rs 2 lakh to enhance coverage of small and marginal farmers and permit small finance banks to extend pre-sanctioned credit lines through UPI to small borrowers to ensure greater financial inclusion.

The two decisions were announced after the Monetary Policy meeting held here on Friday.

At present, banks are required to extend collateral-free agriculture loans up to Rs 1.6 lakh per borrower. This limit was enhanced from Rs 1 lakh, set in the year 2010 to Rs 1.6 lakh in the year 2019.

“Keeping in view the overall inflation and rise in agricultural input costs since then, it has been decided to raise the limit for collateral-free agriculture loans from Rs 1.6 lakh to Rs 2 lakh. This will enhance the coverage of small and marginal farmers in the formal credit system. The circular to this effect will be issued shortly,” the RBI said in a statement.

In order to ensure greater financial inclusion, the RBI has also decided to permit small financial banks (SFBs) to extend pre-sanctioned credit lines through the UPI.

In September 2023, the scope of the Unified Payments Interface (UPI) was expanded by enabling pre-sanctioned credit lines to be linked through UPI and used as a funding account by Scheduled Commercial Banks but Payments Banks, Small Finance Banks (SFBs) and Regional Rural Banks were excluded from this ambit.

“Credit line on UPI has the potential to make available low-ticket, low-tenor products to ‘new-to-credit’ customers. SFBs leverage a high-tech, low-cost model to reach the last mile customer and can play an enabling role in expanding the reach of credit on UPI,” the RBI said.

“It is, therefore, proposed to permit SFBs to extend pre-sanctioned credit lines through the UPI. Necessary guidelines will be issued shortly,” the RBI statement added.