RBI Issues Amendment Directions on Collateral-Free Loans for MSEs

The Reserve Bank of India (RBI) recently issued a notification regarding amendments to collateral requirements for loans to Micro and Small Enterprises (MSEs).

The Reserve Bank of India (RBI), using the powers given to it under Sections 21 and 35A of the Banking Regulation Act, 1949, believes that making these changes is necessary and in the public interest. Therefore, RBI is issuing Amendment Directions. These Amendment Directions will change or update the existing Directions as mentioned below:

1. 4.1 Collateral

• Banks are not allowed to ask for collateral when giving loans up to Rs. 20 lakh to businesses in the Micro and Small Enterprises (MSE) sector. Also, for businesses getting loans under the Prime Minister Employment Generation Programme (PMEGP) run by KVIC, banks are advised to extend collateral-free loans up to Rs. 20 lakh.
• If a Micro or Small Enterprise (MSE) has a good repayment history and is financially strong, the bank may decide not to ask for collateral for loans up to Rs. 25 lakh, depending on the bank’s own rules.
• Banks can use the Credit Guarantee Scheme if it applies to the loan.
• If a borrower voluntarily offers gold or silver as collateral for a loan, even though the loan amount is within the collateral-free limit, the bank accepting that collateral will not be considered a violation of the rule requiring such loans to be collateral-free.

2. Paragraph 6.5 will remain deleted.

Note: These changes will apply to all loans to MSE (Micro and Small Enterprise) borrowers that are approved or renewed on or after April 1, 2026.