RBI Bans Collateral for MSE Loans up to ₹20 Lakh

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  • Last Updated on 11 February, 2026

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RBI collateral-free MSE loans

Circular no. RBI/2025-26/206 FIDD.MSME & NFS.BC.No.12/06.02.31/2025-26; Dated: 09.02.2026

The Reserve Bank of India (RBI) has issued the Lending to Micro, Small and Medium Enterprises (MSME) Sector (Amendment) Directions, 2026, introducing enhanced measures to strengthen collateral-free lending to Micro and Small Enterprises (MSEs).

1. Prohibition on Collateral for Loans up to ₹20 Lakh

Under the amended directions:

  • Banks are prohibited from accepting any collateral security
  • For loans up to ₹20 lakh extended to units in the Micro and Small Enterprise (MSE) sector

This change reinforces RBI’s policy intent of improving credit access for small businesses without asset-backed constraints.

2. Enhanced Collateral-Free Limit up to ₹25 Lakh

Based on the good track record and sound financial position of MSE units:

  • Banks may increase the collateral-free loan limit up to ₹25 lakh
  • Such enhancement must be:
    1. In accordance with the bank’s approved internal credit policy
    2. Supported by appropriate risk assessment and due diligence

This provides banks with flexibility to reward well-performing MSE borrowers.

3. Special Provision for PMEGP Units

RBI has also advised banks to:

  • Extend collateral-free loans up to ₹20 lakh
  • To all units financed under the Prime Minister Employment Generation Programme (PMEGP)

The PMEGP is administered by the Khadi and Village Industries Commission (KVIC).

4. Treatment of Voluntary Pledge of Gold or Silver

The directions clarify that:

  • If a borrower voluntarily pledges gold or silver as collateral
  • For a loan that otherwise qualifies as collateral-free

Such voluntary pledge shall not be treated as a violation of the RBI’s prohibition on collateral for eligible loans.

5. Credit Guarantee Scheme Coverage

Banks are further encouraged to:

  • Avail coverage under the Credit Guarantee Scheme, wherever applicable
  • To mitigate credit risk while extending collateral-free loans to MSE borrowers

6. Applicability and Effective Date

  • The amended directions shall apply to all loans to MSE borrowers
  • That are sanctioned or renewed on or after 1 April 2026

Banks are required to align their lending policies, documentation, and operational processes accordingly.

7. Key Takeaway

The amendment:

  • Strengthens collateral-free credit flow to MSEs
  • Provides flexibility for higher limits for creditworthy units
  • Supports employment generation through PMEGP
  • Balances financial inclusion with prudent risk management
Click Here To Read The Full Circular

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Author: Taxmann

Taxmann Publications has a dedicated in-house Research & Editorial Team. This team consists of a team of Chartered Accountants, Company Secretaries, and Lawyers. This team works under the guidance and supervision of editor-in-chief Mr Rakesh Bhargava.

The Research and Editorial Team is responsible for developing reliable and accurate content for the readers. The team follows the six-sigma approach to achieve the benchmark of zero error in its publications and research platforms. The team ensures that the following publication guidelines are thoroughly followed while developing the content:

  • The statutory material is obtained only from the authorized and reliable sources
  • All the latest developments in the judicial and legislative fields are covered
  • Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
  • Every content published by Taxmann is complete, accurate and lucid
  • All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
  • The golden rules of grammar, style and consistency are thoroughly followed
  • Font and size that's easy to read and remain consistent across all imprint and digital publications are applied