Current · Source: Reserve Bank of India · RBI/2013-14/564 · issued 15 Apr 2014 · ~2 min read
Quick answerRBI directs banks to offer MSE borrowers a lower interest rate reflecting CGTMSE credit guarantee benefits and zero risk weight on the guaranteed portion, but not below the bank's base rate. Banks must also review loan policies to adopt board-approved credit scoring models for MSE evaluation.
The rule, in the simplest words
Banks can give MSE borrowers a lower interest rate because the CGTMSE guarantee and zero risk weight (no extra capital needed for the guaranteed part) help the bank, but the rate cannot be lower than the bank’s base rate.
The lower rate must reflect the cost savings from the guarantee and the capital relief, so it is a real benefit to the MSE borrower.
All scheduled commercial banks (except RRBs) must review their MSE loan policies and use board‑approved credit scoring models to evaluate MSE loan proposals.
These changes aim to make credit to MSEs cheaper and more competitive while keeping a price floor for the bank.
How it plays out — a real example
A gold‑loan officer in Indore meets a small jewelry shop owner who wants a ₹5 lakh loan. Using the new rule, the officer offers a 9% rate (instead of the usual 12%) because the CGTMSE guarantee covers most of the loan and the bank’s base rate is 8%. The shop owner smiles, knowing the loan is cheaper and the bank is protected by the guarantee.
What changed
RBI requires banks to pass on the cost benefits from CGTMSE guarantees and zero risk weight on the guaranteed portion to MSE borrowers through a differential interest rate. Additionally, banks must review their MSE loan policies to incorporate board-approved credit scoring models for loan evaluation.
What it means for you
Banks can reduce pricing for MSE loans by leveraging CGTMSE guarantees and capital relief on the guaranteed portion, but the rate cannot fall below the bank's base rate. This encourages more competitive lending to MSEs while maintaining a floor. The mandate to use credit scoring models aims to standardize and improve risk assessment for MSE proposals.
What you must do
Adjust MSE loan pricing to reflect CGTMSE guarantee benefits and zero risk weight on the guaranteed portion, ensuring the rate is not below the bank's base rate.
Review and update your MSE loan policy to include board-approved credit scoring models for evaluating loan proposals.
Communicate the differential interest rate structure to relevant branches and credit teams for implementation.
Who it affects
All scheduled commercial banks (excluding RRBs), MSE borrowers, Bank credit and risk management teams
❓ Common questions
Can the differential interest rate be set below the base rate?
No, the RBI circular explicitly states that the differential rate of interest for MSE borrowers must not be below the bank's base rate.
What incentives are banks supposed to pass on to MSE borrowers?
Banks must consider the credit guarantee cover from CGTMSE and the zero risk weight for capital adequacy on the guaranteed portion, and offer a lower interest rate reflecting these benefits.
What changes are required in loan policy for MSEs?
Banks must review their loan policy to incorporate board-approved credit scoring models for evaluating MSE loan proposals.
📜 Read the original circular — full text as issued by RBI
RBI/2013-14/564
DBOD.Dir.BC.No.106/13.03.00/2013-14
April 15, 2014
All Scheduled Commercial Banks
(excluding RRBs)
Dear Sir / Madam
Differential Rate of Interest for Micro and Small Enterprises (MSEs)
A reference is invited to part ‘B’ of the First Bi-monthly Monetary Policy Statement, 2014-15 announced on April 1, 2014 wherein certain measures have been proposed to be adopted by banks in order to give a fillip to the flow of credit to micro and small enterprises (MSEs) borrowers.
2. In this regard we advise that while pricing their loans to MSE borrowers, banks should take into account the incentives available to them in the form of the credit guarantee cover of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) and the zero risk weight for capital adequacy purpose for the portion of the loan guaranteed by the CGTMSE and provide differential interest rate for such MSE borrowers, than the other borrowers. However, banks should note that such differential rate of interest is not below the Base Rate of the bank.
3. Further, banks are advised to undertake a review of their loan policy governing extension of credit facilities to the MSE sector, with a view to using Board approved credit scoring models in their evaluation of the loan proposals of MSE borrowers.
Yours faithfully
(Prakash Chandra Sahoo)
Chief General Manager
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2013-14/564 · issued 15 Apr 2014. The plain-English explanation above is BankPulse’s own independent summary.
Communicate the differential interest rate structure to relevant branches and credit teams for implementation.
📜 Compliance
Adjust MSE loan pricing to reflect CGTMSE guarantee benefits and zero risk weight on the guaranteed portion, ensuring the rate is not below the bank's base rate.
Review and update your MSE loan policy to include board-approved credit scoring models for evaluating loan proposals.
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 Compliance officer at a bank this circular applies to (All scheduled commercial banks (excluding RRBs), MSE borrowers, Bank credit and risk management teams), your first concrete step on “Differential Rate of Interest for MSE Borrowers” is: “Adjust MSE loan pricing to reflect CGTMSE guarantee benefits and zero risk weight on the guaranteed portion, ensuring the rate is not below the bank's base rate.” (RBI issued this 15 Apr 2014).
Circular: RBI/2013-14/564 -- Differential Rate of Interest for MSE Borrowers
Issued: 15 Apr 2014
Action required: Adjust MSE loan pricing to reflect CGTMSE guarantee benefits and zero risk weight on the guaranteed portion, ensuring the rate is not below the bank's base rate.
Action required: Review and update your MSE loan policy to include board-approved credit scoring models for evaluating loan proposals.
Action required: Communicate the differential interest rate structure to relevant branches and credit teams for implementation.
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=8840&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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