RBI Doubles Collateral-Free Loan Ceiling For Small Businesses To ₹20 Lakh After 16 Years

(MENAFN- Live Mint) The Reserve Bank of India (RBI) said on Friday that small businesses can now avail of loans up to ₹20 lakh without any collateral, which is double what they were allowed until now.

“With a view to facilitate improved access to formal credit, support entrepreneurial activity and strengthen last mile credit delivery for Micro and Small Enterprises (MSEs) with limited collateral, it has been decided to enhance the limit of collateral free loans to MSEs from ₹10 lakh to ₹20 lakh,” RBI said in a statement on Friday.

The new norms will apply to loans sanctioned or renewed from April onwards. Lenders use a guarantee from the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) for these loans.

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The cap was last revised in 2010, when it was doubled from ₹5 lakh to ₹10 lakh. This was after a central bank committee chaired by the RBI's then executive director VK Sharma suggested measures to enhance its usage. After the report was released in March 2010, the central bank accepted the recommendation to raise the limit two months later.

“MSMEs are the growth engines. They are a very important component of our economy, especially from the point of view of generating employment,” said RBI governor Sanjay Malhotra. He added that the limit of ₹10 lakh had been in place for quite some time and by revising it, the RBI was adjusting for inflation.

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Banks welcomed the move, saying it would help small businesses get sufficient and timely credit.“The decision to raise the collateral-free MSME loan limit to ₹20 lakh acknowledges that India's next phase of enterprise growth will be driven by small, often informal businesses that require timely, unsecured credit rather than complex structures,” said Salee S Nair, managing director and chief executive, Tamilnad Mercantile Bank.

Others said the move would support formalization of the sector.“Importantly, the proposed enhancement of the collateral-free MSME loan cap to ₹20 lakh from ₹10 lakh is a meaningful step towards improving credit access for small businesses and supporting formalisation,” said Rajiv Sabharwal, managing director and chief executive, Tata Capital Ltd.

Friday's announcement came days after finance minister Nirmala Sitharaman proposed a three-pronged approach on micro, small, and medium enterprises, which contribute about 45% of the country's exports and account for about a third of its manufacturing output. This includes a dedicated ₹10,000 crore SME Growth Fund to create future 'champions', a top-up for the Self-Reliant India Fund with ₹2,000 crore to maintain micro enterprises' access to risk capital; and reforms to the TReDS platform designed to solve delayed payment issues for MSMEs.

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