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:
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- In accordance with the bank’s approved internal credit policy
- 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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