Context:

The Reserve Bank of India (RBI) has doubled the collateral-free loan limit for Micro and Small Enterprises (MSEs) from ₹10 lakh to ₹20 lakh.

Key Provisions and Changes:

• Mandatory Rule: Banks cannot demand any collateral security for loans up to ₹20 lakh granted to MSE units. Earlier, the limit was ₹10 lakh (which had remained largely unchanged since 2010).
• Under PMEGP: All units financed under the Prime Minister’s Employment Generation Programme (PMEGP) must also be mandatorily provided collateral-free loans up to ₹20 lakh.
• Additional Relaxation: If an MSE unit has a good track record and strong financial position, banks may extend collateral-free loans up to ₹25 lakh as per their internal policies.
• Credit Guarantee Scheme: Wherever applicable, banks can avail benefits under schemes such as CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises), which reduces the credit risk for banks.
• Voluntary Gold/Silver Pledge: If a borrower voluntarily chooses to pledge gold or silver within the ₹20 lakh limit, it will not be considered a violation of the collateral-free rule.
• Effective Date: Applicable to all new or renewed loans from April 1, 2026.

Positive Impact:

1. Improved Access to Credit : Most micro and small enterprises do not possess assets like land or property to offer as collateral. The earlier ₹10 lakh limit had become less effective due to inflation and rising business costs. Increasing the limit to ₹20 lakh will enable small traders, manufacturers, and service providers to access formal bank credit more easily instead of relying on expensive informal sources such as moneylenders.

2. Boost to Entrepreneurship and Employment : This step will promote small enterprises, especially in rural and semi-urban areas. Increased formal credit leads to higher investment, greater production, and more job creation. It aligns well with government initiatives such as Atmanirbhar Bharat and Make in India.

3. Benefits for Banks : Under schemes like CGTMSE, a significant portion of the credit risk (often 75–85%) is covered. This enables banks to expand lending more confidently in the MSE segment.

4. Impact on Women, SC/ST, and Young Entrepreneurs : Several government schemes (such as Stand-Up India and PMEGP) already provide collateral-free provisions. The increased limit under general MSE loans will further benefit these groups and encourage inclusive entrepreneurship.

Reserve Bank of India (RBI) :

• The Reserve Bank of India was established on April 1, 1935, under the RBI Act, 1934. It was nationalized in 1949.
• The first Governor of RBI was Sir Osborne Smith (1935–1937), and the first Indian Governor was C. D. Deshmukh (1943–1949).
• The headquarters of RBI is located in Mumbai, Maharashtra.
• Under Section 22 of the RBI Act, RBI has the sole authority to issue currency in India.
• The Monetary Policy Committee (MPC) was constituted in 2016 to determine the repo rate and control inflation.
• The repo rate is the rate at which RBI lends short-term funds to commercial banks.
• The Cash Reserve Ratio (CRR) is the percentage of a bank’s total deposits that must be maintained with RBI in cash.
• The Statutory Liquidity Ratio (SLR) is the percentage of a bank’s Net Demand and Time Liabilities (NDTL) that must be maintained in the form of liquid assets.