Banks seek RBI clarity on collateral-free loans up to Rs 20 lakh for small businesses

Banks have approached the Reserve Bank of India seeking clarity on the government's collateral-free loan scheme for small businesses. The scheme, which allows loans up to Rs 20 lakh without any security, has left lenders uncertain about key terms. The Economic Times first reported this development.

Lenders are specifically asking for guidance on loan tenure, repayment schedules, and what happens in case of default. Without clear rules, banks fear they may end up with non-performing assets that cannot be recovered. The ambiguity is slowing disbursal of funds meant to revive the MSME sector.

What the scheme offers

Announced as part of a stimulus package, the scheme guarantees 100% of the loan amount to the lending institution. The government's Credit Guarantee Fund Trust for Micro and Small Enterprises will back these loans. This removes the need for collateral, making credit accessible to small businesses that often lack assets to pledge.

But banks argue that without explicit RBI guidelines, they cannot operationalise the scheme. They want the central bank to specify whether existing prudential norms will apply. For instance, should these loans be treated as standard assets from day one, or can they be restructured later?

The missing circular

RBI has not yet issued a formal circular addressing these concerns. Bankers say they need written instructions to proceed. Oral assurances from government officials are not enough to override internal risk assessment frameworks. A senior banker told the publication that without clarity, "we are stuck in a limbo."

The scheme was expected to inject liquidity into the economy quickly. But the lack of operational clarity has created a bottleneck. Small business owners complain that banks are still asking for documents and guarantees, defeating the purpose of a collateral-free loan.

Industry reaction

Industry bodies representing MSMEs have urged both the finance ministry and RBI to resolve the impasse. They point out that small businesses are bleeding cash and need urgent working capital. Delays in loan processing could push many towards closure.

Some bankers have suggested that the scheme could be linked to existing RBI frameworks like the MSME restructuring window. This would give lenders a familiar template to follow. But others warn that over-regulation could make the scheme unattractive for banks.

What happens next

RBI is expected to meet with bank representatives in the coming weeks. The central bank may issue a clarification or a draft circular for public comment. Until then, the flow of collateral-free loans remains uncertain.

Small businesses will be watching closely as the outcome of these discussions will determine whether the scheme becomes a lifeline or just another policy on paper.