Context: To strengthen credit flow to small businesses, the Reserve Bank of India (RBI) has proposed raising the ceiling for collateral-free bank loans to MSMEs. Alongside this, RBI has also proposed permitting bank lending to Real Estate Investment Trusts (REITs) under strict prudential safeguards. The move is aimed at deepening formal credit access while maintaining financial stability.
What is the New Collateral-Free Loan Proposal?
The RBI has proposed doubling the collateral-free loan limit for MSMEs from ₹10 lakh to ₹20 lakh. This is a significant reform because many micro and small enterprises lack land, property, or fixed assets that banks usually demand as collateral.
The proposal encourages banks to shift towards cash-flow based lending, where credit decisions are made using:
- business turnover,
- repayment behaviour,
- digital transaction history, and
- viability of the enterprise.
This approach reduces overdependence on asset-backed lending and improves inclusion of first-generation entrepreneurs.
The reform also aligns with Priority Sector Lending (PSL) norms and complements credit guarantee frameworks, which reduce bank risk while improving MSME access to affordable loans.
Why This Matters for MSMEs
MSMEs are often described as the backbone of the Indian economy but face a major financing bottleneck.
- India’s MSME sector faces an estimated credit gap of ₹20–25 lakh crore, largely due to collateral constraints.
- Around 40–45% of micro enterprises depend on informal lenders, leading to high interest costs and financial vulnerability.
- MSMEs employ around 11 crore people, meaning easier credit directly supports wage stability, expansion, and job creation.
Thus, expanding collateral-free lending can promote formalisation, productivity growth, and resilience of small firms.
Status of MSMEs in India
- India has about 6.3 crore MSMEs, and nearly 99% are micro enterprises (Udyam data).
- They contribute nearly 30% to GDP and around 45% to manufacturing output.
- MSMEs account for about 43–45% of India’s merchandise exports, making them essential for global competitiveness.
Other Measure: Bank Lending to REITs
RBI has also proposed allowing banks to lend to REITs, enabling regulated credit flow into income-generating commercial real estate. This could strengthen infrastructure financing and support real estate formalisation.
However, to avoid systemic risk, RBI proposes prudential controls such as:
- exposure limits,
- risk weights,
- due diligence norms, and
- concentration safeguards.
Conclusion
By expanding collateral-free lending and promoting cash-flow based assessment, RBI’s proposal can significantly improve MSME credit access, reduce dependence on informal finance, and support employment growth.
If supported by strong monitoring and credit discipline, it can become a key driver of inclusive industrial expansion.