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The Reserve Bank of India (RBI) has announced an important change for small businesses. The collateral-free loan limit for Micro and Small Enterprises (MSEs) has been increased from ₹10 lakh to ₹20 lakh. This change is expected to apply to loans sanctioned or renewed from 1 April 2026.
This decision can significantly improve access to finance for small entrepreneurs who struggle to obtain loans because they do not have property or assets to pledge.
This article explains the policy in simple language, its background, likely impact, and how small businesses can benefit.
Under the new proposal, banks will be allowed to provide loans up to ₹20 lakh to eligible MSMEs without asking for collateral.
Collateral-free loans mean that the borrower does not have to pledge land, property, machinery or other assets as security. Instead, loan decisions are based on business performance, cash flow and repayment capacity.
The objective of RBI is to improve credit access for small businesses and encourage entrepreneurship, especially among first-time business owners.
The earlier limit of ₹10 lakh had remained unchanged for many years. During this time:
Small businesses were finding it difficult to expand within the old limit. RBI’s decision reflects the need to update lending rules according to present economic conditions.
Another reason is the growing shift toward cash-flow based lending. Banks are increasingly assessing real business activity rather than only physical assets.
MSMEs are a major pillar of India’s economy. They contribute significantly to employment, manufacturing and exports. Despite this importance, access to formal credit has always been a major challenge.
Many MSME owners operate from rented premises and do not own property. Because of this, banks often rejected loan applications even when businesses were performing well.
By increasing the collateral-free limit, RBI aims to:
For many small businesses, ₹10 lakh was not enough to handle inventory, supplier payments or day-to-day operations. The new limit provides greater flexibility and reduces cash pressure.
Manufacturing businesses often require additional funds for machinery, raw materials and production expansion. A higher loan limit can help them scale operations and accept larger orders.
First-generation entrepreneurs usually lack assets to offer as collateral. This change allows them to start or grow businesses without risking personal property.
Banks are likely to focus more on:
Businesses that maintain proper financial records will have better chances of approval.
This means documentation and business transparency will become more important.
The policy is especially helpful for:
Businesses that maintain regular banking transactions and clear financial records are likely to benefit first.
If you plan to apply for a collateral-free loan, start preparing now:
Banks increasingly rely on data and financial behaviour when approving unsecured loans.
This decision shows a clear shift in India’s lending ecosystem. Earlier, assets were the primary requirement for loans. Now, business performance and financial discipline are becoming equally important.
For MSMEs, this is both an opportunity and a responsibility. Businesses that maintain strong financial practices will find it easier to grow in the coming years.
Tabrez Khan
Founder and Author — BusinessZindagi.com
Focused on simplifying finance, business policies and entrepreneurship for Indian small business owners.
This article was prepared using AI-assisted research based on publicly available financial and policy information. Readers should consult banks or financial advisors before taking financial decisions.
Economic Times – RBI collateral-free loan update
https://economictimes.indiatimes.com/wealth/borrow/from-rs-10-lakh-to-rs-20-lakh-collateral-free-loan-limit-will-be-doubled-for-these-borrowers-rbi-mpc/articleshow/127970246.cms
Economic Times – RBI proposes doubling MSME loan limit
https://economictimes.indiatimes.com/small-biz/sme-sector/rbi-proposes-doubling-msme-collateral-free-loan-limit-to-rs-20-lakh/articleshow/127972122.cms
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