RBI To Double MSME Collateral-Free Loan Limit To Rs 20 Lakh

The RBI, in its bi-monthly monetary policy, proposed a slew of reforms ranging from doubling the collateral-free loan limit for MSMEs from Rs 10 lakh to Rs 20 lakh, enhancing customer protection and digital payment safeguards, reviewing the lead bank scheme, revamping the Kisan Credit Card framework, bank financing to REITs, and the introduction of credit derivatives in corporate bonds.

The enhanced limit of collateral-free loans of Rs 20 lakh for MSMEs shall be applicable to all loans sanctioned or renewed on or after April 1, 2026. MSME collateral-free loans are offered via the Pradhan Mantri Mudra Yojana (PMMY) with a limit of up to Rs 10 lakh. This covers manufacturing, services, and related sectors.

Speaking to reporters at the bi-monthly post-policy press conference, Malhotra emphasized that the net borrowings of the RBI have barely moved up in FY27 and that it is the metric bond markets should look at. The net borrowing of the Centre was Rs 1.4 lakh crore in FY07 and remained almost stable in FY08 at Rs 1.5 lakh crore. It jumped 50 per cent in FY09 to Rs 2.2 lakh crore. Since then, it has progressively increased to reach Rs 4.7 lakh crore in FY13. However, it declined thereafter to Rs 3.5 lakh crore in FY17. In FY21, owing to the pandemic, it increased to Rs 11.4 lakh crore and has hardly moved to Rs 11.7 lakh crore in FY27. "From that perspective, borrowing numbers do not look large," Malhotra said. The market has been expecting some reforms in the State Development Loans market, which will possibly happen as stated in the 16th Finance Commission report. Also, the governor emphasized that buybacks, once announced, will pull down gross borrowings.

On gold loans, Malhotra said that the loan-to-value ratios in the gold lending segment, which denote the quantum of money that can be given to borrowers against the security, are much lower than the prescribed norms across the industry. He said that as against the allowed limit of up to 85 per cent, financiers have been keeping the LTV ratio at a much smaller level in practice, which has helped allay concerns in the book.

The overall gold loan outstanding across the financial system nearly doubled in the two years to November 2025, as the spike in gold prices made lenders more comfortable. However, a sharp fall in the prices of the commodity over the past few days has led to concerns as borrowers may default on their obligations.

The RBI also allowed banks to lend to Real Estate Investment Trusts (REITs), a move expected to lower the cost of capital for REITs, as bank funding is cheaper and longer-tenor compared to bond or NBFC financing. REITs today raise debt funds through the issuance of debt securities, which are subscribed by mutual funds, NBFCs, etc. Since these investors prefer instruments with a 3–5 year tenor, long-term funding remains a challenge. India’s five publicly listed REITs are Brookfield India Real Estate Trust, Embassy Office Parks REIT, Knowledge Realty Trust, Mindspace Business Parks REIT, and Nexus Select Trust.

The RBI also announced the liberalization of branch expansion for gold NBFCs, which is expected to significantly ease operational constraints for gold loan lenders and accelerate their expansion plans.

As proposed in the Union Budget 2026-27, the RBI also proposed issuing the regulatory framework for derivatives on corporate bond indices and total return swaps on corporate bonds. This will help provide another route for money to flow into corporate bonds.

On financial inclusion, the RBI proposed issuing a revised set of instructions to banks on the Kisan Credit Card Scheme. The proposed guidelines include, among others, standardization of crop seasons, extension of KCC tenure to six years, alignment of drawing limits with the Scale of Finance (SoF) for each crop season, and inclusion of expenses on technological interventions. The draft guidelines will be issued shortly.