RBI Directive: Collateral-Free Loans Up to ₹20 Lakh for MSEs

By Eram Shaikh --
Tuesday, 10 Feb, 2026

In a major boost to India’s micro, small, and medium enterprises (MSME) sector, the Reserve Bank of India (RBI) has directed banks not to insist on collateral security for loans up to ₹20 lakh provided to micro and small enterprises (MSEs). Announced on February 9, 2026, this policy doubles the earlier limit of ₹10 lakh and aims to improve access to formal credit for small businesses that often lack assets to pledge.

The updated guidelines form part of the RBI’s Lending to Micro, Small & Medium Enterprises (MSME) Sector (Amendment) Directions, 2026. They apply to all loans sanctioned or renewed on or after April 1, 2026. RBI Governor Sanjay Malhotra explained that the move seeks to “facilitate improved access to formal credit, support entrepreneurial activity, and strengthen last-mile credit delivery” for MSEs with limited collateral. This step is especially relevant as MSMEs contribute over 30% to India’s GDP and employ millions, yet many struggle to secure funding due to strict collateral requirements.

The directive mandates collateral-free loans up to ₹20 lakh for units financed under the Prime Minister’s Employment Generation Programme (PMEGP), run by the Khadi and Village Industries Commission (KVIC). This linkage is expected to benefit rural and semi-urban entrepreneurs in areas like handicrafts, food processing, and small-scale manufacturing. Banks may also extend the limit to ₹25 lakh for MSEs with a proven track record and strong financials, based on their internal credit policies.

To address lender concerns, the RBI encourages the use of credit guarantee schemes such as those from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). These schemes help mitigate default risks, making banks more willing to offer unsecured loans. The RBI has also clarified that voluntary pledging of gold or silver by borrowers does not violate the collateral-free rule, providing flexibility while keeping the core intent intact.

This threshold increase responds to rising costs, inflation, and post-pandemic challenges faced by small businesses. Industry experts believe it could significantly expand credit availability, particularly for women entrepreneurs, startups, and businesses in tier-2 and tier-3 cities where asset ownership is limited.

For the policy to succeed, banks will need to shift from asset-based to cash flow-based lending, leveraging digital tools, AI credit scoring, and faster approval processes. Effective implementation will be key to preventing any rise in non-performing assets while maximising benefits for genuine borrowers.

How MSMEs Can Benefit from This RBI Directive

Easier Access to Credit: Businesses without significant assets can now obtain loans up to ₹20 lakh without collateral, speeding up funding for working capital, expansion, or daily operations.
Lower Borrowing Costs: No need for collateral valuation, legal charges, or pledging reduces overall loan expenses and improves profitability.
Support for New & Women-Led Ventures: Startups and women entrepreneurs, often short on assets, gain better entry into formal finance, promoting inclusivity.
Alignment with Government Schemes: PMEGP beneficiaries receive direct collateral-free support, aiding rural and village-based enterprises.
Potential for Higher Limits: Strong-performing MSMEs can access up to ₹25 lakh without collateral, incentivising good financial discipline.

RBI’s initiative is a forward-looking step toward inclusive growth. By removing collateral barriers for loans up to ₹20 lakh, it empowers small entrepreneurs to invest in operations, technology, and expansion without the burden of pledging assets. This could unlock substantial credit flow, fuel innovation, and strengthen the MSME sector’s role in India’s economic progress.

RBI Directive: Collateral-Free Loans Up to ₹20 Lakh for MSEs. In a major boost to India’s micro, small, and medium enterprises (MSME) sector, the Reserve Bank of India (RBI) has directed banks not to insist on collateral security for loans up to ₹20 lakh provided to micro and small enterprises (MSEs). Announced on February 9, 2026, this policy doubles the earlier limit of ₹10 lakh and aims to improve access to formal credit for small businesses that often lack assets to pledge.

The updated guidelines form part of the RBI’s Lending to Micro, Small & Medium Enterprises (MSME) Sector (Amendment) Directions, 2026. They apply to all loans sanctioned or renewed on or after April 1, 2026. RBI Governor Sanjay Malhotra explained that the move seeks to “facilitate improved access to formal credit, support entrepreneurial activity, and strengthen last-mile credit delivery” for MSEs with limited collateral. This step is especially relevant as MSMEs contribute over 30% to India’s GDP and employ millions, yet many struggle to secure funding due to strict collateral requirements.

The directive mandates collateral-free loans up to ₹20 lakh for units financed under the Prime Minister’s Employment Generation Programme (PMEGP), run by the Khadi and Village Industries Commission (KVIC). This linkage is expected to benefit rural and semi-urban entrepreneurs in areas like handicrafts, food processing, and small-scale manufacturing. Banks may also extend the limit to ₹25 lakh for MSEs with a proven track record and strong financials, based on their internal credit policies.

To address lender concerns, the RBI encourages the use of credit guarantee schemes such as those from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). These schemes help mitigate default risks, making banks more willing to offer unsecured loans. The RBI has also clarified that voluntary pledging of gold or silver by borrowers does not violate the collateral-free rule, providing flexibility while keeping the core intent intact.

This threshold increase responds to rising costs, inflation, and post-pandemic challenges faced by small businesses. Industry experts believe it could significantly expand credit availability, particularly for women entrepreneurs, startups, and businesses in tier-2 and tier-3 cities where asset ownership is limited.

For the policy to succeed, banks will need to shift from asset-based to cash flow-based lending, leveraging digital tools, AI credit scoring, and faster approval processes. Effective implementation will be key to preventing any rise in non-performing assets while maximising benefits for genuine borrowers.

<h3>How MSMEs Can Benefit from This RBI Directive</h3>

<ul>
 <li>Easier Access to Credit: Businesses without significant assets can now obtain loans up to ₹20 lakh without collateral, speeding up funding for working capital, expansion, or daily operations.</li>
 <li>Lower Borrowing Costs: No need for collateral valuation, legal charges, or pledging reduces overall loan expenses and improves profitability.</li>
 <li>Support for New & Women-Led Ventures: Startups and women entrepreneurs, often short on assets, gain better entry into formal finance, promoting inclusivity.</li>
 <li>Alignment with Government Schemes: PMEGP beneficiaries receive direct collateral-free support, aiding rural and village-based enterprises.</li>
 <li>Potential for Higher Limits: Strong-performing MSMEs can access up to ₹25 lakh without collateral, incentivising good financial discipline.</li>
</ul>

RBI’s initiative is a forward-looking step toward inclusive growth. By removing collateral barriers for loans up to ₹20 lakh, it empowers small entrepreneurs to invest in operations, technology, and expansion without the burden of pledging assets. This could unlock substantial credit flow, fuel innovation, and strengthen the MSME sector’s role in India’s economic progress.