In a major move to bridge the credit gap for small businesses, RBI Governor Sanjay Malhotra announced on February 6, 2026, that the limit for collateral-free loans for Micro and Small Enterprises (MSEs) will be doubled from ₹10 lakh to ₹20 lakh.
The decision was a highlight of the final Monetary Policy Committee (MPC) meeting of the 2025–26 fiscal year, aimed at facilitating easier access to formal credit for entrepreneurs who often lack significant assets to pledge as security.
1. Doubling the Safety Net
The enhancement of the loan ceiling is designed to help micro-entrepreneurs scale their operations without the “entry barrier” of mortgaging property or other assets.
- Effective Date: The revised limit will apply to all loans sanctioned or renewed on or after April 1, 2026.
- Eligible Borrowers: Primarily directed at Micro and Small Enterprises (MSEs). This includes those operating in manufacturing, services, and retail/wholesale trade (which are classified as MSMEs for priority sector lending).
- Unsecured Lending: Since these loans are “collateral-free,” banks and NBFCs cannot ask for land, buildings, or jewelry as a mortgage for amounts up to ₹20 lakh.
2. Integration with the MUDRA Scheme
The RBI’s move aligns with a broader recommendation to harmonize limits across various government schemes.
- Mudra Refinance: While the current Pradhan Mantri Mudra Yojana (PMMY) has three categories—Shishu (up to ₹50,000), Kishore (up to ₹5 lakh), and Tarun (up to ₹10 lakh)—the new RBI cap effectively paves the way for a potential “Tarun Plus” category or an extension of the existing Mudra limits to ₹20 lakh.
- No Processing Fees: Consistent with current collateral-free norms for small borrowers, these loans typically feature no processing fees and simplified documentation.
3. Why Now? The “Credit Gap” Problem
Despite being the backbone of the Indian economy (contributing ~30% to GDP), many small units remain “credit starved.”
- Informal Sector Dependence: Reports suggest nearly 40% of MSMEs still rely on informal lenders who charge exorbitant interest rates because they cannot provide collateral to formal banks.
- Digital and Cash-Flow Lending: The RBI is encouraging banks to move away from “asset-centric” models toward cash-flow-based lending. By using digital footprints (GST data, UPI transactions, and the Udyam Assist Platform), banks can now assess the creditworthiness of a small business without needing a physical mortgage.
4. Safeguards and Risk Management
While the move is welcomed by industry bodies, banking experts have voiced some caution:
- Asset Quality: Unsecured lending carries a higher credit risk. The RBI has urged banks to strengthen their internal “appraisal mechanisms” to prevent a rise in Non-Performing Assets (NPAs).
- Credit Guarantee: Most of these loans will be backed by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), which provides a fallback for lenders in case of default.
Conclusion: Empowering First-Generation Founders
The hike to ₹20 lakh is a “Goldilocks” move—large enough to provide meaningful working capital for a growing business, yet small enough to be managed under existing credit guarantee umbrellas. For thousands of first-generation entrepreneurs in India, this represents a significant shift from “borrowing against what you have” to “borrowing against what you do.”
