Banks are facing challenges implementing the RBI’s ₹20 lakh collateral-free loan mandate for small businesses. Issues include ineligibility for government guarantee schemes and borrower resistance to extra fees. Lenders are now asking the regulator for clarity to streamline credit flow and manage potential risks.
Indian banks are currently navigating implementation hurdles regarding the Reserve Bank of India’s (RBI) directive to provide collateral-free loans of up to ₹20 lakh to small enterprises. This policy, which came into effect on April 1, 2026, was designed to improve credit access for businesses that lack significant assets to pledge. However, the practical application of this rule has hit a roadblock, prompting banks to seek formal clarification from both the RBI and the government.
Challenges with Guarantee Coverage
A central issue involves the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This government-backed scheme provides a safety net to lenders, covering a portion of potential losses if a borrower defaults. Many of the small business accounts currently under consideration for these loans are ineligible for CGTMSE coverage. Specifically, some accounts are currently classified as restructured or are under the special mention account category, known as SMA-2, where payments have been delayed by 61 to 90 days. Because these accounts do not meet the criteria for the guarantee scheme, banks are hesitant to extend unsecured credit.
Borrower Costs and Lender Caution
Beyond eligibility, there is a mismatch in expectations regarding costs. Even when accounts are eligible for the CGTMSE cover, many borrowers are reportedly unwilling to pay the required guarantee fees. With thin profit margins across the small business sector, these additional costs are often viewed as a burden. From the banking side, there is a high level of caution regarding regulatory compliance. Lenders fear that if they accept any form of asset pledge for loans intended to be collateral-free, they may face punitive action from the regulator. Conversely, without the protection of the guarantee scheme, banks are concerned about the risk of bad loans.
The Path Forward for SME Credit
The banking sector is now looking for a unified resolution to reconcile these operational difficulties. The primary goal is to ensure that credit flows to deserving micro and small enterprises without forcing banks to compromise on their internal risk management standards. Investors should watch for any upcoming circulars or official clarifications from the RBI that may adjust the eligibility criteria for the CGTMSE scheme or provide banks with more flexibility in managing these loans. The resolution of these fee-related and eligibility-related bottlenecks will be important for assessing the pace of credit growth in the SME segment over the coming quarters.