No previlege to works contract under the ambit of MSMED Act - Business Guardian
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Policy&Politics

No previlege to works contract under the ambit of MSMED Act

Chapter IV of the Act provides for the measures for promotion, development and enhancement of competitiveness of Micro, Small and Medium Enterprises. Chapter V deals with the mechanism of adjudicating the delayed payment disputes of Micro and Small Enterprises through Facilitation Councils by adopting the Alternative Dispute Resolution processes. Any supplier who had supplied the goods or rendered any service to a buyer is entitled to receive the payment on time and in case of non-payment or delayed payment, the suppliers can approach the Facilitation Council of their respective State.

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The Micro, Small and Medium Enterprises (MSMEs) is a highly vibrant and dynamic sector of the Indian economy with over 6 crores units, providing employment to 11 crores + people which is just next to Agriculture in our Country. The MSMEs are estimated to contribute nearly 30% of the nation’s GDP. Like other sectors, MSME sector has also been adversely affected in terms of productivity during COVID-19. The Government of India has taken several steps as a follow up on recommendations and impact of COVID-19. The Government has a systematic institutional arrangement to promote MSMEs which covers a legislative and regulatory framework. Due to these efforts, once again, MSMEs are widening their domain across sectors to meet demands of domestic as well as global markets.

The legislature, with an objective of facilitating the promotion & development and enhancing the competitiveness of MSMEs enacted the Micro, Small and Medium Enterprises Development Act (MSMED Act) on 16th June, 2006. The Act provides for several privileges/ benefits for the micro, small and medium enterprises who file the memorandum and register itself with the government. Chapter IV of the Act provides for the measures for promotion, development and enhancement of competitiveness of Micro, Small and Medium Enterprises. Chapter V deals with the mechanism of adjudicating the delayed payment disputes of Micro and Small Enterprises through Facilitation Councils by adopting the Alternative Dispute Resolution processes. Any supplier who had supplied the goods or rendered any service to a buyer is entitled to receive the payment on time and in case of non-payment or delayed payment, the suppliers can approach the Facilitation Council of their respective State. However, the MSMEs who had entered into a work contract require vigilance and legal awareness before entering into such contracts as generally they are not rendered the benefits of the MSMED Act. Hence, works contract is an exception. This write-up is focused on Works Contract, its characteristics, exclusion from the ambit of Act and way ahead.

“WORKS CONTRACT” AND ITS CHARACTERISTICS:

Work Contract is a separate species of contract distinct from contracts for services simpliciter recognized by the world of commerce and law. Simply put, a works contract is essentially a contract of service which may also involve supply of goods in the execution of the contract. In a general sense, a contract of works, may relate to both immovable and immovable property. Example- if a sub-contractor, undertakes a sub-contract for the building work, it would be a works contract in relation to immovable property. Similarly, if a composite supply in relation to movable property such as fabrication/painting/annual maintenance contracts etc. is undertaken, the same would come within the ambit of the broad definition of a works contract. Even if in a contract, besides the obligations of supply of goods and materials and performance of labour and services, some additional obligations are imposed, such contract does not cease to be works contract. The additional obligations in the contract would not alter the nature of contract so long as the contract provides for a contract for works and satisfies the primary description of works contract. The term “works contract” cannot be confined to a contract to provide labour and services but is a contract for undertaking or bringing into existence some “works”.

The Constitutional Bench of the Hon’ble Supreme Court (SC), over-ruling the earlier decision of three-member Bench re State of A.P. v. Kone Elevators (India) Ltd., has held that the activity of manufacture, erection, installation and commissioning of lift is indeed a ‘works contract’ and not a ‘contract for sale of goods’. The basic characteristics of works contract that clearly emerge out of the various decision of Apex Court are –

(a) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services;

(b) the concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as a works contract is not applicable;

(c) the term “works contract” as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone;

The Larger Bench of the SC in the case of M/s Kone Elevators India Pvt Ltd v. State of Tamil Nadu held that a contract for supply and installation of lift is a composite contract for supply of goods as well as provision of service and that the service element is obvious is such a contract. Thus, the activity of supply and installation of lift would constitute to be a works contract. The Larger Bench, thus, reversed its earlier decision based on the logic that the major component was the lift and that the skill and labour employed was only incidental to the supply of lift and that this is a contract for sale of goods.

EXCLUSION OF WORKS CONTRACT FROM THE AMBIT OF MSMED ACT:

The benefits of the MSMED Act and Public Procurement Policy could not be extended to the MSEs registered under the MSMED Act. Works contract are excluded from the ambit of MSMED Act and there are various judicial pronouncements by several High Courts regarding the same. The Bombay High Court in case of Sterling Wilson Pvt Limited v. Union of India & Ors. held that the contract under tender is a composite contract for supply of goods as well as installation of fire water spray system, which is a permanent fixture. The goods supplied under the contract are eventually assembled and installed at site and become part of the permanent fixture. The said contract satisfies fundamental characteristics of work contract and hence cannot be considered as a contract simplicitor for sale of goods and services. As stated earlier, the MSMED Act and the Public Procurement Policy is applicable only to procurement of goods and services. The contract under tender not being a contract for sale of goods and predominantly a work contract, the benefits of the Act and the Policy could not be extended to the MSEs registered under the Act.

In another case of PL Adke v. Wardha Municipal Council, Bombay High Court held that the MSMED Act contemplates supply of goods, purchase of goods, and rendering an acceptance of services. In the present case, having coming to the conclusion that it is a works contract and being indivisible and absent the need to deconstruct the contract into its components of sale supply and performance of labour related work it is evident that the MSMED Act cannot be made applicable.

The Allahabad High Court in M/s Rahul Singh v. Union of India & Ors. also reiterated this view. It further held that no provision of the 2006 Act bids us to deconstruct a works contract into elements relating to supply of goods and provision of service. Neither section 11 nor the Public Procurement Policy, 2012 appears to envisage a composite and distinct category.

The Andhra Pradesh High Court very recently in case of Rashtriyalspat Nigam Limited v. The Union Of India discussed that it can be very clearly seen from the figures submitted by the respondent-contractor himself that a very very large percentage of the work or the predominant part of the work is civil and structural work only. Supply element is a small part. The High Court lastly held that the Act 27, 2006 would not apply to the works contracts which were awarded by the Visakhapatnam Steel Plant in these cases by a process of tender. Some element of supply is involved in these works and that by itself is not enough for this Court to hold that the stand of the respondents is correct.

These all pronouncement makes it clear that the works contract are kept outside the ambit of MSMED Act, 2006 as the same are composite and indivisible. However, the judgement passed by Bombay High Court in case of PL Adke (Supra) has been challenged before the Supreme Court vide Special Leave Petition bearing SLP (C) No.4970 of 2021 and the same is pending. Arguments completed on 15.02.2022 in the said Special Leave Petition and judgment is reserved since February, 2022.

WAY AHEAD:

It is very difficult to offer the benefits of MSMED Act to works contract, since a works contract is composite, continuous and indivisible, and ascertaining the appointed date or a date of acceptance is next to impossible. Although the other financial benefits vide schemes, subsidy etc can very well availed by the enterprises. Most MSMEs are not wary of this distinction and sign contracts without due diligence. Although the issue is now pending before the Supreme Court, amid this, the Calcutta High Court has passed an interesting order just few days back. The Calcutta High Court in case of NBCC (India) Ltd. v. The State of West Bengal and Ors., has held that objections regarding the non-applicability of the MSMED Act to works contract can be decided in arbitration by MSME Council. The Division Bench of Chief Justice Prakash Shrivastava and Justice Rajarshi Bharadwaj upheld the order of the Single Bench whereby the petitioner was referred to arbitration before the MSME Council with a direction that his objection regarding the non-applicability of the MSMED Act as the contract was a works contract would be decided by the Arbitral Tribunal.

Although the Suppliers can take help of this ruling of Calcutta High Court at time of filing of reference before the Facilitation Council and can explore the possibilities of conciliation, yet, it is advised that the MSMEs while entering such works contract must incorporate the provisions of dispute resolution mechanism. Further, the MSMED Act also needs a clarification on the same. The construction activities mostly fall under works contract, yet, the contractors register themselves under MSMED Act under Section F, Division 41 to 43 of the NIC code. But it would not serve its real purpose if they cannot avail the benefit of Procurement Policy or recovery mechanism under the Act as it is a beneficial legislation. The Government while making any decision or giving any clarification cannot ignore the aspect that MSME-registered service enterprises, in specific works contracts are the second largest employers in India. Therefore, it will be interesting to see whether the works contractors can also earn the benefits of MSMED Act in near future.

(The Author is Legal Consultant based in Chandigarh and views are personal.)

One of the very first cases referred to Project Monitoring Group (PMG) by the Prime Minister’s Office was related to an investment of about Rs 2,000 crore that had been made around the Delhi airport to set up an Aero-City that housed a number of hotels. This was not coming to fruition because of certain security concerns expressed by the local police.

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Policy&Politics

Govt extends date for submission of R&D proposals

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The Government has extended the deadline for submission of proposals related to R&D scheme under the National Green Hydrogen Mission. The R&D scheme seeks to make the production, storage, transportation and utilisation of green hydrogen more affordable. It also aims to improve the efficiency, safety and reliability of the relevant processes and technologies involved in the green hydrogen value chain. Subsequent to the issue of the guidelines, the Ministry of New & Renewable Energy issued a call for proposals on 16 March, 2024.

While the Call for Proposals is receiving encouraging response, some stakeholders have requested more time for submission of R&D proposals. In view of such requests and to allow sufficient time to the institutions for submitting good-quality proposals, the Ministry has extended the deadline for submission of proposals to 27th April, 2024.

The scheme also aims to foster partnerships among industry, academia and government in order to establish an innovation ecosystem for green hydrogen technologies. The scheme will also help the scaling up and commercialisation of green hydrogen technologies by providing the necessary policy and regulatory support.

The R&D scheme will be implemented with a total budgetary outlay of Rs 400 crore till the financial year 2025-26. The support under the R&D programme includes all components of the green hydrogen value chain, namely, production, storage, compression, transportation, and utilisation.

The R&D projects supported under the mission will be goal-oriented, time bound, and suitable to be scaled up. In addition to industrial and institutional research, innovative MSMEs and start-ups working on indigenous technology development will also be encouraged under the Scheme.

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Policy&Politics

India, Brazil, South Africa to press for labour & social issues, sustainability

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The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment.

India, on Thursday, joined the G20’s two-day 2nd Employment Working Group (EWG) meeting under the Brazilian Presidency which is all set to address labour, employment and social issues for strong, sustainable, balanced and job-rich growth for all. India is co-chairing the 2nd EWG meeting, along with Brazil and South Africa, and is represented by Sumita Dawra, Secretary, Labour & Employment.

The Indian delegation also comprises Rupesh Kumar Thakur, Joint Secretary, and Rakesh Gaur, Deputy Director from the Ministry of Labour & Employment. India has pointed out that the priority areas of the 2nd EWG at Brasilia align with the priority areas and outcomes of previous G20 presidencies including Indian presidency, and commended the continuity in the multi-year agenda to create lasting positive change in the world of work. This not only sustains but also elevates the work initiated by the EWG during the Indian Presidency.

The focus areas for the 2nd EWG meeting are — creating quality employment and promoting decent labour, addressing a just transition amidst digital and energy transformations, leveraging technologies to enhance the quality of life for al and the emphasis on gender equity and promoting diversity in the world of employment for inclusivity, driving innovation and growth. On the first day of the meeting, deliberations were held on the over-arching theme of promotion of gender equality and promoting diversity in the workplace.

The Indian delegation emphasized the need for creating inclusive environments by ensuring equal representation and empowerment for all, irrespective of race, gender, ethnicity, or socio-economic background. To increase female labour force participation, India has enacted occupational safety health and working conditions code, 2020 which entitles women to be employed in all establishments for all types of work with their consent at night time. This provision has already been implemented in underground mines.

In 2017, the Government amended the Maternity Benefit Act of 1961, which increased the ‘maternity leave with pay protection’ from 12 weeks to 26 weeks for all women working in establishments employing 10 or more workers. This is expected to reduce the motherhood pay gap among the working mothers. To aid migrant workers, India’s innovative policy ‘One Nation, One Ration Card’ allows migrants to access their entitled food grains from anywhere in the Public Distribution System network in the country.

A landmark step in fostering inclusion in the workforce is the e-Shram portal, launched to create a national database of unorganized workers, especially migrant and construction workers. This initiative, providing the e-Shram card, enables access to benefits under various social security schemes.

The portal allows an unorganized worker to register himself or herself on the portal on self-declaration basis, under 400 occupations in 30 broad occupation sectors. More than 290 million unorganized workers have been registered on this portal so far.

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Policy&Politics

India to spend USD 3.7 billion to fence Myanmar border

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India plans to spend nearly $3.7 billion to fence its 1,610-km (1,000-mile) porous border with Myanmar within about a decade, said a source with direct knowledge of the matter, to prevent smuggling and other illegal activities. New Delhi said earlier this year it would fence the border and end a decades-old visa-free movement policy with coup-hit Myanmar for border citizens for reasons of national security and to maintain the demographic structure of its northeastern region.

A government committee earlier this month approved the cost for the fencing, which needs to be approved by Prime Minister Narendra Modi’s cabinet, said the source who declined to be named as they were not authorised to talk to the media. The prime minister’s office and the ministries of home, finance, foreign affairs and information and broadcasting did not immediately respond to an email seeking comment.

Myanmar has so far not commented on India’s fencing plans. Since a military coup in Myanmar in 2021, thousands of civilians and hundreds of troops have fled from there to Indian states where people on both sides share ethnic and familial ties. This has worried New Delhi because of risk of communal tensions spreading to India. Some members of the Indian government have also blamed the porous border for abetting the tense situation in the restive north-eastern Indian state of Manipur, abutting Myanmar.

For nearly a year, Manipur has been engulfed by a civil war-like situation between two ethnic groups, one of which shares lineage with Myanmar’s Chin tribe. The committee of senior Indian officials also agreed to build parallel roads along the fence and 1,700 km (1,050 miles) of feeder roads connecting military bases to the border, the source said.

The fence and the adjoining road will cost nearly 125 million rupees per km, more than double that of the 55 million per km cost for the border fence with Bangladesh built in 2020, the source said, because of the difficult hilly terrain and the use of technology to prevent intrusion and corrosion.

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Policy&Politics

ONLY 2-3% RECOVERED FROM $2-3 TN ANNUAL ILLEGAL TRADE THROUGH BANKING: INTERPOL

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However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity.

In a press briefing held on Wednesday, Interpol Secretary General Jurgen Stock unveiled alarming statistics regarding the extent of undetected money laundering and illegal trade transactions plaguing the global banking network. Stock revealed that over 96% of the money transacted through this network remains undetected, with only 2-3% of the estimated USD 2-3 trillion from illegal trade being tracked and returned to victims.

Interpol, working in conjunction with law enforcement agencies and private financial sectors across its 196 member countries, is committed to combating the rising tide of fraud perpetrated by illicit traders. These criminal activities encompass a wide spectrum, including drug trafficking, human trafficking, arms dealing, and the illicit movement of financial assets.

Stock emphasized the urgent need to establish mechanisms for monitoring transactions within the global banking network. Currently, efforts are underway to engage banking associations worldwide in setting up such a framework. However, Stock highlighted the enormity of the challenge, noting that between 40% and 70% of criminal profits are reinvested, perpetuating the cycle of illicit financial activity. The lack of real-time information sharing poses a significant obstacle to law enforcement agencies in their efforts to combat money laundering and illegal trade.

Stock underscored the role of Artificial Intelligence (AI) in exacerbating this problem, citing its use in voice cloning and other fraudulent activities. Criminal organizations are leveraging AI technologies to expand their operations and evade detection on a global scale. Stock emphasized the importance of enhanced cooperation between law enforcement agencies and private sector banking groups. Realtime information sharing is crucial in the fight against illegal wealth accumulation.

Drawing inspiration from initiatives such as the “Singapore Anti-Scam Centre,” Stock called for the adoption of similar models in other countries to strengthen the collective response to financial crimes. In conclusion, Stock’s revelations underscore the pressing need for concerted action to combat global financial crimes. Enhanced cooperation between public and private sectors, coupled with innovative strategies for monitoring and combating illicit transactions, is essential to safeguarding the integrity of the global financial system.

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Policy&Politics

FM defends Atal Pension Scheme, highlights guaranteed returns

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Finance Minister Nirmala Sitharaman defended the Atal Pension Yojana (APY) against Congress criticism, asserting its design based on choice architecture and a guaranteed minimum 8% return. She emphasized the scheme’s opt-out feature, facilitating automatic premium continuation unless subscribers choose otherwise, promoting retirement savings. Sitharaman countered Congress allegations of coercion, stating the APY’s guaranteed returns irrespective of market conditions, supplemented by government subsidies.

Responding to Congress’s claim of scheme misuse, Sitharaman highlighted its intended beneficiaries – the lower-income groups. She criticized Congress for its alleged elitist mindset and emphasized the scheme’s success in targeting the needy. Sitharaman accused Congress of exploiting vote bank politics and coercive tactics, contrasting it with the APY’s transparent framework. The exchange underscores the political debate surrounding social welfare schemes, with the government defending its approach while opposition parties raise concerns about implementation and efficacy.

Finance Minister Nirmala Sitharaman’s robust defense of the Atal Pension Yojana (APY) against Congress criticism highlights the ongoing debate over social welfare schemes in India. Sitharaman’s assertion of the APY’s design principles, including its opt-out feature and guaranteed minimum return, underscores the government’s commitment to promoting retirement savings among lower-income groups. The Atal Pension Yojana, named after former Prime Minister Atal Bihari Vajpayee, was launched in 2015 to provide pension benefits to workers in the unorganized sector. It aims to address the significant gap in pension coverage among India’s workforce, particularly those employed in informal and low-income sectors. The scheme offers subscribers fixed pension amounts ranging from Rs. 1,000 to Rs. 5,000 per month, depending on their contribution and age at entry, after attaining the age of 60. Sitharaman’s response comes after Congress criticism alleging the APY’s inefficacy and coercive tactics in enrolment.

Congress General Secretary Jairam Ramesh described the scheme as poorly designed, citing instances of subscribers dropping out due to unauthorized account openings. However, Sitharaman refuted these claims, emphasizing the APY’s transparent and beneficiary-oriented approach. The finance minister’s defense focuses on three key aspects of the APY: Choice Architecture: Sitharaman highlights the opt-out feature of the APY, which automatically continues premium payments unless subscribers choose to discontinue.

This design element aims to encourage long-term participation and ensure consistent retirement savings among subscribers. By simplifying the decision-making process, the scheme seeks to overcome inertia and promote financial discipline among participants. Guaranteed Minimum Return: Sitharaman underscores the APY’s guarantee of a minimum 8% return, irrespective of prevailing interest rates. This assurance provides subscribers with confidence in the scheme’s financial viability and incentivizes long-term savings.

The government’s commitment to subsidizing any shortfall in actual returns further strengthens the attractiveness of the APY as a retirement planning tool. Targeting the Needy: Sitharaman defends the predominance of pension accounts in lower income slabs, arguing that it reflects the scheme’s successful targeting of its intended beneficiaries – the poor and lower-middle class. She criticizes Congress for its alleged elitist mindset and suggests that the party’s opposition to welfare schemes like the APY stems from a disconnect with the needs of marginalized communities. Sitharaman’s rebuttal also addresses broader political narratives surrounding social welfare policies in India.

She accuses Congress of exploiting vote bank politics and coercive tactics, contrasting it with the transparent and inclusive framework of the APY. The exchange underscores the ideological differences between the ruling Bharatiya Janata Party (BJP) and the opposition Congress, with each side advocating for their vision of social welfare and economic development. In addition to defending the APY, Sitharaman’s remarks shed light on the broader challenges and opportunities facing India’s pension sector.

Despite significant progress in expanding pension coverage through schemes like the APY, the country still grapples with issues such as financial literacy, informal employment, and pension portability. Addressing these challenges requires a multifaceted approach involving government intervention, private sector participation, and civil society engagement.

As India strives to achieve its vision of inclusive and sustainable development, initiatives like the APY play a crucial role in promoting economic security and social equity. Sitharaman’s defense of the scheme underscores the government’s commitment to addressing the needs of vulnerable populations and ensuring their financial well-being in the long run.

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Economic

Regulatory steps will make financial sector strong, but raise cost of capital

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India’s financial system regulator, the Reserve Bank of India (RBI), is demonstrating a serious commitment to improving governance and transparency at finance companies and banks, with the RBI’s recent measures aimed at curtailing lenders’ overexuberance, enhancing compliance culture and safeguarding customers.

While the global ratings firm has appreciated the RBI’s “diminishing tolerance for non-compliance, customer complaints, data privacy, governance, know-your-customer (KYC), and anti-money laundering issues”, it has cautioned that increased regulatory risk could impede growth and raise the cost of capital for financial institutions. “Governance and transparency are key weaknesses for the Indian financial sector and weigh on our analysis. The RBI’s new measures are creating a more robust and transparent financial system,” says S&P Global Credit Analyst, Geeta Chugh. “India’s regulator has underscored its commitment to strengthening the financial sector. The drawback will be higher capital costs for institutions,” Chugh cautions.

The RBI measures include restraining IIFL Finance and JM Financial Products from disbursing gold loan and loans against shares respectively and asking Paytm Payments Bank (PPBL) to stop onboarding of new customers. Earlier in December 2020, the RBI suspended HDFC Bank from sourcing new credit card customers after repeated technological outages. These actions are a departure from the historically nominal financial penalties imposed for breaches, S&P Global notes.

Besides, as the global agency points out, the RBI has decided to publicly disclose the key issues that lead to suspensions or other strict actions against concerned entities and become more vocal in calling out conduct that it deems detrimental to the interests of customers and investors. “We believe that increased transparency will create additional pressure on the entire financial sector to enhance compliance and governance practices,” adds Chugh. The global agency has also lauded the RBI’s recent actions demonstrating scant tolerance for any potential window-dressing of accounts.

These actions include the provisioning requirement on alternative investment funds that lend to the same borrower as the bank finance company. Amidst the possibility of some retail loans, such as personal loans, loans against property, and gold loans getting diverted to invest in stock markets and difficulty of ascertaining the end-use of money in these products, S&P Global underlines the faith of market participants that the RBI and market regulator, the Securities and Exchange Board of India, want to protect small investors by scrutinizing these activities more cautiously.

On the flip side, at a time of tight liquidity, the RBI’s new measures are likely to limit credit growth in fiscal 2025 (year ending March 2025). “We expect loan growth to decline to 14 per cent in fiscal 2025 from 16 per cent in fiscal 2024, reflecting the cumulative impact of all these actions,” says Chugh. The other side of the story is that stricter rules may disrupt affected entities and increase caution among fintechs and other regulated entities and the RBI’s decision to raise risk weights on unsecured personal loans and credit cards may constrain growth. Household debt to GDP in India (excluding agriculture and small and midsize enterprises) increased to an estimated 24 per cent in March 2024 from 19 per cent in March 2019. Growth in unsecured loans has also been excessive and now forms close to 10 per cent of total banking sector loans.

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