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)
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.