The Reserve Bank of India (RBI) on Monday announced key amendments to its lending guidelines for the micro, small and medium enterprises (MSME) sector, increasing the collateral-free loan limit for micro and small enterprises (MSEs) to ₹20 lakh. The move is aimed at improving access to institutional credit for smaller businesses that often struggle to provide collateral.
Under the revised directions, banks are mandated not to seek collateral security for loans up to ₹20 lakh extended to MSE units. The central bank also advised lenders to provide collateral-free loans up to ₹20 lakh for all units financed under the Prime Minister Employment Generation Programme (PMEGP), which is administered by the Khadi and Village Industries Commission (KVIC).
According to the updated guidelines, banks may further increase the collateral-free threshold to ₹25 lakh for MSE units with a strong financial track record and sound credit profile, subject to their internal policies. In such cases, banks can also avail themselves of the benefits of the Credit Guarantee Scheme cover, wherever applicable.
The RBI clarified that if borrowers voluntarily pledge gold or silver as collateral for loans sanctioned within the collateral-free limit, it will not be considered a violation of the mandate. This provision ensures flexibility for borrowers who choose to offer assets despite not being required to do so.
These amendments have been incorporated into the Master Direction on Lending to the MSME Sector, which was last updated in July 2025. The central bank stated that the revised norms are intended to strengthen last-mile credit delivery, especially for micro and small enterprises with limited asset bases.
In addition to raising the collateral-free threshold, the new directions also align MSME lending rules with recent regulatory changes announced separately by the RBI. The central bank highlighted that these reforms are part of its broader strategy to improve institutional credit flow to MSMEs, a sector considered vital for employment generation and economic growth.
The amended norms will come into effect from April 1, 2026, the RBI said in its press release. RBI Governor Sanjay Malhotra had earlier announced the policy change during the monetary policy statement last Friday.
Earlier, Finance Minister Nirmala Sitharaman had also announced in the Union Budget 2026-27 that the Self-Reliant India Fund would be topped up by ₹4,000 crore in 2026-27 to provide additional support to MSMEs.