1. Applicable Entities
These directions modify the Master Direction – Lending to Micro, Small & Medium Enterprises (MSME) Sector (Updated as on July 23, 2025). Consequently, the amendments are applicable to:
- All Scheduled Commercial Banks (SCBs)
- Small Finance Banks (SFBs)
- (Excluding Regional Rural Banks, unless specified otherwise in associated circulars)
2. Specific Changes Required
The amendment introduces two primary modifications to the existing regulatory framework for MSME lending.
| Amendment Area | Description of Change |
|---|---|
| Collateral-Free Loan Limit |
The mandatory limit for extending collateral-free loans to Micro and Small Enterprises (MSEs) has been enhanced to ₹20 lakh.
Objective: To strengthen last-mile credit delivery for MSEs that possess limited assets to offer as collateral. |
| Regulatory Alignment | Modifications have been made to align with separate regulatory notifications issued recently. This ensures the Master Direction remains consistent with the broader regulatory ecosystem for 2026. |
Note: While banks may typically extend collateral-free loans beyond this limit based on track record (often up to ₹25 lakh per internal policy), the mandatory threshold without collateral has now been explicitly raised to ₹20 lakh.
3. Management Action Plan
To ensure compliance by the effective date of April 01, 2026, financial institutions must execute the following strategic actions:
1
Policy Revision: Update the internal “MSME Lending Policy” to reflect the new ₹20 lakh collateral-free threshold. Remove any system validations that demand collateral for MSE loans between the old limit and ₹20 lakh.
2
Product Note & Circulars: Issue internal circulars to all credit processing centers and branches detailing the amendment. Update product notes for MSME loan products (e.g., Working Capital, Term Loans) to align with the new mandate.
3
Credit Guarantee Coverage: Review coverage under schemes like CGTMSE. Ensure that loans falling into the new collateral-free bracket (up to ₹20 lakh) are adequately covered under credit guarantee schemes to mitigate risk.
4
Staff Training: Conduct training sessions for Branch Managers and Credit Officers to ensure they do not deny applications or insist on collateral for proposals under ₹20 lakh, ensuring compliance with the “last mile credit delivery” objective.
5
System Configuration: Configure the Core Banking System (CBS) and Loan Originating Systems (LOS) to flag or auto-approve collateral waivers for eligible MSE applications up to ₹20 lakh effective from April 01, 2026.