The Reserve Bank of India (RBI) has clarified the rules regarding collateral-free loans of up to ₹20 lakh for borrowers in the Micro and Small Enterprises (MSE) sector. The clarification is important for banks as well as MSE borrowers because it explains when banks can and cannot take collateral security.
No Collateral for MSE Loans Up to ₹20 Lakh
As per the RBI guidelines, banks must not accept collateral security for loans up to ₹20 lakh given to MSE units. This rule applies to all loans sanctioned or renewed on or after April 1, 2026.
This means that eligible MSE borrowers taking or renewing loans of up to ₹20 lakh should not be asked to provide property or other collateral security for the loan.
Banks Sought Exemptions
The Indian Banks’ Association (IBA) received representations from member banks regarding difficulties in implementing the collateral-free lending requirement. The IBA requested the RBI to provide exemptions in two situations:
- MSE loan accounts that are not eligible for coverage under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).
- Cases where the borrower voluntarily offers collateral security.
RBI Rejects the Proposed Exemptions
The RBI has clarified that these exemptions cannot be allowed. This means the collateral-free requirement will continue to apply even when an MSE loan is not eligible for CGTMSE coverage or when the borrower is willing to provide collateral.
What Happens to Existing Collateral?
The RBI has also provided separate instructions for loans where collateral was already taken. For working capital facilities of up to ₹20 lakh that are renewed on or after April 1, 2026, banks must release any collateral security that was obtained earlier.
However, for term loans of up to ₹20 lakh that were sanctioned before April 1, 2026, any collateral already taken can be retained until the maturity of the loan.
Key Rules for Banks
| Situation | RBI Rule |
|---|---|
| New MSE loan up to ₹20 lakh sanctioned on or after April 1, 2026 | No collateral can be taken |
| MSE loan up to ₹20 lakh renewed on or after April 1, 2026 | No collateral can be taken |
| Working capital facility up to ₹20 lakh renewed after April 1, 2026 | Earlier collateral must be released |
| Term loan up to ₹20 lakh sanctioned before April 1, 2026 | Existing collateral can be retained until maturity |
| Loan not eligible for CGTMSE coverage | No exemption from the collateral-free requirement |
| Borrower voluntarily offers collateral | Bank cannot accept collateral under the clarification |
What This Means for MSE Borrowers
In simple terms, eligible MSE borrowers can get loans of up to ₹20 lakh without providing collateral security. Banks cannot make an exception simply because the loan is not covered under CGTMSE or because the borrower is voluntarily ready to provide collateral.
The RBI has directed that the collateral-free lending requirement must be followed for eligible MSE loans up to ₹20 lakh. Banks are required to comply with these guidelines while sanctioning or renewing such loans.
