Summary of this article
Banks face hurdles in extending Rs 20 lakh collateral-free MSE loans.
Guarantee scheme gaps and fees complicate loan rollout for lenders.
Banks may seek RBI and government clarity on implementation issues.
Banks are facing obstacles in implementing the Reserve Bank of India's (RBI) mandate to offer collateral-free loans of up to Rs 20 lakh to eligible micro and small enterprises (MSEs). The issues include gaps in guarantee coverage, and higher borrowing costs for certain businesses.
RBI Rule Aims To Improve Credit Access
Under RBI rules, banks must provide collateral-free loans of up to Rs 20 lakh to eligible MSE borrowers. The requirement applies to fresh loans as well as renewals sanctioned from April 1, 2026. The central bank announced the measure during its February monetary policy review to improve access to formal credit for small businesses that have limited assets to pledge as security.
Guarantee Coverage And Borrower Costs
One of the key concerns is the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), a government scheme which provides partial credit guarantee cover to banks for eligible loans. The guarantee reduces lenders' risk, but not all loan accounts qualify for the scheme, according to a report in the Economic Times.
The report said that some borrowers, who are eligible for the guarantee, are unwilling to pay the additional guarantee fee, as it increases their borrowing cost at a time when business margins are under pressure.
Banks are also facing uncertainty when borrowers voluntarily offer collateral. Such loans generally attract a lower rate of interest because they are considered less risky than unsecured loans. However, according to the report, lenders are cautious about accepting security as they fear it could be seen as a violation of the RBI’s collateral-free lending rules.
Some Loan Accounts Outside Guarantee Scheme
Certain loan accounts cannot be covered under the CGTMSE scheme. These include restructured accounts and those classified as Special Mention Account (SMA)-2, according to the report. SMA-2 accounts are loans where repayments are overdue by 61-90 days.
Without the guarantee cover, banks have to bear the full credit risk on such loans, making lending decisions more difficult in these cases.
According to the report, lenders are now planning to approach the government and the RBI to seek clarity on these issues. They are expected to request guidance on the treatment of borrowers who voluntarily offer collateral and on guarantee coverage for loan accounts that currently fall outside the scheme.
While announcing the measure in its February 2026 monetary policy statement, RBI had stated that the collateral-free lending requirement would improve access to formal credit, support entrepreneurial activity, and strengthen last-mile credit delivery for MSEs.
