What Happened
- The Reserve Bank of India has issued a directive mandating banks not to insist on collateral security for loans up to Rs 20 lakh extended to units in the Micro and Small Enterprise (MSE) sector.
- This represents a significant increase from the previous collateral-free threshold of Rs 10 lakh, doubling the limit for small borrowers.
- Banks have the discretion to raise this limit further to Rs 25 lakh based on the borrower's track record and financial position.
- The directive also covers units financed under the Prime Minister Employment Generation Programme (PMEGP) administered by the Khadi and Village Industries Commission (KVIC).
- Banks can avail the Credit Guarantee Scheme (CGTMSE) cover to mitigate credit risk on these collateral-free loans.
Static Topic Bridges
Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE)
CGTMSE was established in 2000 by the Ministry of MSME and SIDBI to provide credit guarantee cover to lending institutions for collateral-free loans to MSE borrowers. The scheme eliminates the need for both collateral and third-party guarantees, with guarantee coverage ranging from 75% to 85% of the sanctioned amount depending on loan size and borrower category. The maximum loan covered under CGTMSE has been enhanced from Rs 5 crore to Rs 10 crore.
- Established: 2000 (Ministry of MSME + SIDBI)
- Maximum guarantee cover: Rs 10 crore per borrower
- Guarantee coverage: 75-85% of sanctioned credit
- Annual guarantee fee: tiered by loan size (lower for small-ticket loans up to Rs 10 lakh)
- Udyam Registration mandatory for availing guarantee
- No collateral or third-party guarantee required
Connection to this news: The RBI's collateral-free mandate and CGTMSE cover work in tandem — banks extend loans without collateral to MSEs, and the CGTMSE guarantee absorbs a substantial portion of the default risk, encouraging banks to lend to riskier but underserved micro and small enterprises.
Prime Minister Employment Generation Programme (PMEGP)
PMEGP is a credit-linked subsidy scheme for setting up micro enterprises in the non-farm sector. It is administered by KVIC at the national level and implemented through State KVIC Directorates, State Khadi and Village Industries Boards, District Industries Centres, and banks. The scheme provides a margin money subsidy of 25-35% of the project cost (15-25% in urban areas), with the rest financed as a bank loan.
- Nodal agency: Khadi and Village Industries Commission (KVIC)
- Maximum project cost: Rs 50 lakh (manufacturing), Rs 20 lakh (services)
- Margin money subsidy: 25-35% (rural/special category) and 15-25% (urban)
- Beneficiary contribution: 5-10% of project cost
- Merged the earlier PMRY and REGP schemes
- No income ceiling for applicants; minimum age: 18 years
Connection to this news: By specifically including PMEGP units within the Rs 20 lakh collateral-free mandate, the RBI ensures that aspiring micro-entrepreneurs using government subsidies can access the remaining bank loan component without the barrier of collateral.
Financial Inclusion and MSME Credit Gap
India's MSME sector comprises over 63 million enterprises contributing approximately 30% of GDP, yet faces a credit gap estimated at Rs 25-30 lakh crore. The credit gap is most acute for micro enterprises, where 90% of units are informal and lack adequate documentation or collateral for bank loans. The RBI's priority sector lending norms mandate 7.5% of ANBC for micro enterprises, but actual disbursement has historically fallen short due to banks' risk aversion in unsecured lending.
- Total MSMEs in India: over 63 million (mostly micro enterprises)
- MSME share of GDP: ~30%
- MSME share of exports: ~48%
- Estimated MSME credit gap: Rs 25-30 lakh crore
- PSL sub-target for micro enterprises: 7.5% of ANBC
- Formal credit penetration among micro enterprises: below 10%
Connection to this news: Raising the collateral-free threshold from Rs 10 lakh to Rs 20 lakh directly addresses the credit gap at the micro-enterprise level, where the average loan requirement typically falls within this range but is blocked by collateral demands.
Key Facts & Data
- New collateral-free loan limit for MSEs: Rs 20 lakh (up from Rs 10 lakh)
- Banks may raise limit to Rs 25 lakh at their discretion
- CGTMSE guarantee coverage: 75-85%, maximum Rs 10 crore
- PMEGP maximum project cost: Rs 50 lakh (manufacturing), Rs 20 lakh (services)
- Total MSMEs in India: over 63 million
- MSME contribution to GDP: ~30%
- Estimated MSME credit gap: Rs 25-30 lakh crore