New Delhi: Banks are finding it difficult to extend collateral-free loans of up to ₹20 lakh to small businesses, as some accounts aren’t covered under the government-backed guarantee scheme for small firms. Many borrowers are also unwilling to pay the additional guarantee fees.Lenders now plan to approach the government and the Reserve Bank of India (RBI) on the issue, said people familiar with the developments.
“If an account is covered under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), partial risk is covered, giving us comfort to expand lending,” one of the persons said, adding most borrowers who are still to avail the scheme are unwilling to subscribe, stating that it adds to their costs at a time when margins are already tight.
Under RBI norms, banks are mandated to provide collateral-free loans of up to ₹20 lakh to eligible small borrowers. The rule applies to loans given or renewed from April 1, 2026.The central bank in its February monetary policy review said this will facilitate improved access to formal credit, support entrepreneurial activity and strengthen last-mile credit delivery for micro and small enterprises (MSEs) with limited collateral. “The other issue is that in case the borrower is pledging an asset, the interest rate is slightly lower as against an unsecured loan,” the person said.
“But lenders are now reluctant to take collateral, fearing violation of RBI guidelines and punitive action.” Another bank executive said some accounts under the ₹20 lakh collateral-free loan category also fall in the restructured or tagged as special mention accounts, making them ineligible for CGTSME cover. Special mention accounts, or SMA-2 category accounts, are borrowings where repayments are 61 to 90 days overdue.
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