RBI mandates collateral-free loans up to Rs 10 lakh for MSEs
Current · Source: Reserve Bank of India · RBI/2009-10/449 · issued 06 May 2010 · ~2 min read
Quick answerRBI has accepted a Working Group's recommendation to raise the collateral-free loan limit for MSEs from Rs 5 lakh to Rs 10 lakh, making it mandatory for banks. Banks can seek CGS cover for these loans and must encourage branch staff to use the scheme.
The rule, in the simplest words
Banks must not ask for any collateral (something valuable to keep as security) for loans up to Rs 10 lakh to Micro and Small Enterprises (MSEs).
Banks can protect themselves by using the Credit Guarantee Scheme (CGS), which means the government fund will cover part of the loss if the borrower cannot repay.
Bank CEOs must push branch staff to use the CGS and count this usage when evaluating their performance.
All banks need to update their policies, train staff on CGS, and tell every branch to follow the new rule right away.
How it plays out — a real example
Rohit, a loan officer in Indore, gets a request from a small bakery for a Rs 8 lakh loan. He approves the loan without asking for any property as security, registers it under the Credit Guarantee Scheme, and notes the CGS usage in his monthly performance report, feeling proud that he helped the bakery grow while following the RBI’s new rule.
What changed
The RBI increased the mandatory collateral-free loan limit for Micro and Small Enterprises (MSEs) from Rs 5 lakh to Rs 10 lakh, effective immediately. Banks are now required to not accept collateral for loans up to this new limit and can avail Credit Guarantee Scheme (CGS) cover. Additionally, banks must actively promote CGS usage among branch staff and consider it in performance evaluations.
What it means for you
This directive significantly eases credit access for MSEs by removing collateral requirements for loans up to Rs 10 lakh, reducing a major barrier for small businesses. For banks, it mandates a shift in lending practices and requires proactive adoption of CGS to mitigate risk, with potential implications for loan portfolio composition and staff incentives.
What you must do
Update internal lending policies to prohibit collateral acceptance for MSE loans up to Rs 10 lakh.
Train branch staff on CGS procedures and benefits to ensure seamless adoption.
Incorporate CGS usage as a performance metric for field staff evaluations.
Issue clear instructions to all branches and controlling offices for strict compliance.
Acknowledge receipt of this circular to the RBI as directed.
Who it affects
All Scheduled Commercial Banks including RRBs and LABs, Micro and Small Enterprises (MSEs) seeking credit, Branch-level lending officers and field staff, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
❓ Common questions
What is the new collateral-free loan limit for MSEs?
The limit has been raised from Rs 5 lakh to Rs 10 lakh, and banks are mandated not to accept collateral for loans up to this amount.
Can banks still take collateral for loans above Rs 10 lakh?
The circular only addresses loans up to Rs 10 lakh; for amounts above this, existing collateral norms may apply, but banks are encouraged to use CGS for higher limits as per scheme guidelines.
How does this affect branch staff performance evaluation?
Banks must make CGS cover availing a criterion in evaluating field staff, incentivizing them to use the scheme for collateral-free loans.
📜 Read the original circular — full text as issued by RBI
RBI/2009-10/449
RPCD.SME & NFS. BC.No. 79 /06.02.31/2009-10
May 6, 2010
The Chairman/ Managing Director
All Scheduled Commercial Banks
(Including Regional Rural Banks and Local Area Banks)
Dear Sir
Working Group to Review the Credit Guarantee Scheme for Micro and Small Enterprises (MSEs) – Collateral free loans to MSEs
As you are aware, a Working Group was constituted by the Reserve Bank of India to review the Credit Guarantee Scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small Enterprises (Chairman: Shri V.K. Sharma, Executive Director, RBI) and suggest measures to enhance its usage. The Report of the Working Group was released on March 6, 2010, which is available on our website ( www.rbi.org.in ). The Working Group has, inter alia, recommended that
"the limit for collateral free loans to the MSE sector be increased from the present level of Rs. 5 lakh to Rs.10 lakh and it be made mandatory for banks. Banks, in turn, can take cover for the collateral free credit facilities under CGS. In order to upscale the CGS, it is necessary to create widespread awareness about the key features and benefits of the Scheme. As the branch level functionaries have a predilection to lend against collaterals, the Group recommends that the Chief Executive Officers (CEOs) of banks assume complete and total ownership in the matter of strongly encouraging the branch level functionaries to avail of the CGS cover, including making performance in this regard a criterion in the evaluation of their field staff."
The above recommendations have been accepted by the Reserve Bank of India. Accordingly, in modification of our circular RPCD.SME & NFS.BC.No.16/06.02.31(P)/2009-10 dated August 24, 2009 , banks are mandated not to accept collateral security in the case of loans upto Rs 10 lakh extended to units in the MSE sector.
2. Banks may also strongly encourage their branch level functionaries to avail of the CGS cover, including making performance in this regard a criterion in the evaluation of their field staff.
3. You are requested to issue suitable instructions to your branches/ controlling offices for meticulous and strict compliance in this regard.
4. Please acknowledge receipt.
Yours faithfully
(R.C. Sarangi)
Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2009-10/449 · issued 06 May 2010. The plain-English explanation above is BankPulse’s own independent summary.
Train branch staff on CGS procedures and benefits to ensure seamless adoption.
Issue clear instructions to all branches and controlling offices for strict compliance.
💰 Credit
Update internal lending policies to prohibit collateral acceptance for MSE loans up to Rs 10 lakh.
📜 Compliance
Incorporate CGS usage as a performance metric for field staff evaluations.
Acknowledge receipt of this circular to the RBI as directed.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template
Example: if you are a Credit Manager at a bank this circular applies to (All Scheduled Commercial Banks including RRBs and LABs, Micro and Small Enterprises (MSEs) seeking credit, Branch-level lending officers and field staff, Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)), your first concrete step on “RBI mandates collateral-free loans up to Rs 10 lakh for MSEs” is: “Update internal lending policies to prohibit collateral acceptance for MSE loans up to Rs 10 lakh.” (RBI issued this 06 May 2010).
Circular: RBI/2009-10/449 -- RBI mandates collateral-free loans up to Rs 10 lakh for MSEs
Issued: 06 May 2010
Action required: Update internal lending policies to prohibit collateral acceptance for MSE loans up to Rs 10 lakh.
Action required: Train branch staff on CGS procedures and benefits to ensure seamless adoption.
Action required: Incorporate CGS usage as a performance metric for field staff evaluations.
Action required: Issue clear instructions to all branches and controlling offices for strict compliance.
Action required: Acknowledge receipt of this circular to the RBI as directed.
Owner: ____________ Target date: ____________
Board/committee approval needed? Y / N
Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.
💬 Banker Discussion
Discuss this circular with fellow bankers — reply, upvote what helps, report what doesn’t belong. Be professional; no client data. Views are the commenter’s own, not BankPulse’s.
BankPulse Compliance Evidence Pack — generated 03 Aug 2026 · status cross-checked against RBI’s official withdrawal register (refreshed weekly). Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5657&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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