RBI amends MSME lending directions, increases collateral-free loan limit to Rs 20 lakh

New Delhi: The Reserve Bank of India (RBI) on Monday announced amendments to its lending directions for the micro, small and medium enterprises (MSME) sector, increasing the collateral-free loan limit for micro and small enterprises (MSEs) to Rs 20 lakh in a move aimed at improving credit access for smaller businesses.

PSU Watch is now on Whatsapp Channels. Click here to join

"Banks are mandated not to accept collateral security in the case of loans up to Rs 20 lakh extended to units in the MSE sector. Banks are also advised to extend collateral-free loans up to Rs 20 lakh to all units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by KVIC," amended guidelines said.

Banks may, on the basis of good track record and financial position of the MSE units, increase the limit to dispense with the collateral requirement for loans up to Rs 25 lakh as per their internal policy and banks may avail the benefit of Credit Guarantee Scheme cover, where applicable, according to new norms.

However, accepting gold and silver as collateral pledged voluntarily by borrowers for loans sanctioned by the banks up to the collateral free limit, will not be construed as a violation of the mandate, it said.

The amendments have been made to the Master Direction Lending to MSME Sector, which was last updated in July 2025.

According to the RBI, the revised norms are intended to strengthen last-mile credit delivery to micro and small enterprises that often face constraints in providing collateral due to limited asset bases.

In addition to enhancing the collateral-free loan threshold, the amended directions also align MSME lending guidelines with certain regulatory changes that have been notified separately by the central bank.

The RBI said these changes are part of its broader efforts to improve the flow of institutional credit to the MSME sector, which is a key driver of employment and economic activity.

The amended directions will come into effect from April 1, 2026, the central bank said in a press release.

RBI governor Sanjay Malhotra announced this during the monetary policy announcement last Friday.

Prior to this, Finance Minister Nirmala Sitharaman in the Union Budget 2026-27 announced that the Self-Reliant India Fund will be topped up by Rs 4,000 crore in 2026-27 to support MSMEs.

(PSU Watch– India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy is now on Google News. Click here to follow. Also, join PSU Watch Channel in your Telegram. You may also follow us on Twitter here and stay updated.)