A higher collateral-free limit moves the small-business credit test to cash flow

India’s higher collateral-free threshold for micro and small enterprise loans can help viable firms without property to pledge. The outcome will depend on whether lenders can assess those firms’ cash flows and manage losses. The RBI’s February amendment requires banks not to accept collateral security for covered MSE loans up to ₹20 lakh and takes effect for relevant loans sanctioned or renewed from 1 April 2026. It also allows banks, subject to internal policy and a firm’s track record and financial position, to dispense with collateral up to ₹25 lakh. These changes affect security for a loan. They do not guarantee that any applicant receives one. RBI amendment to the micro and small enterprise lending directions · RBI’s summary of the collateral-free lending amendment

Collateral performs two jobs

Collateral can reduce the lender’s loss if a loan fails and can affect which applicants seek finance. It can also exclude a business with reliable receipts whose owner has little acceptable property. Requiring security may be administratively easier than working out whether a small firm’s accounts and orders support repayment. Removing the requirement can improve access when the lender has other evidence of viability. Where lenders lack that evidence, the change can lead to smaller approved amounts, stricter cash-flow criteria or higher prices. Track those responses together with the number of loans originated. RBI amendment to the micro and small enterprise lending directions · RBI’s summary of the collateral-free lending amendment

Consider two otherwise comparable illustrative loans of ₹15 lakh. Assume a five per cent probability of default over a defined horizon and a loss of ₹4 lakh if the bank can recover much of the secured loan. Expected loss in the simplified example is ₹20,000. If recovery on an unsecured loan leaves a loss of ₹9 lakh, expected loss becomes ₹45,000 at the same default probability. The ₹25,000 difference is not a rate recommendation and ignores timing, costs and guarantees. It shows why a lender needs either better screening, different pricing or another way to manage recoveries. The probability itself can also change as the pool of borrowers changes.

The better screen is a business test

A loan for inventory can be assessed against the firm’s normal sales cycle, buyer concentration and the terms on which it pays suppliers. A machine purchase calls for a longer view of operating cash and the costs of keeping the asset productive. A lender can examine payment records, invoices and bank flows where the firm can provide them. It should allow for seasonality and temporary interruptions. A pattern of regular receipts is useful, though it does not by itself establish profits or the ability to make a payment during a weak period. Viable younger firms may need a way to demonstrate the economics of an order or expansion without a long record.

Requiring sophisticated records from every applicant can reproduce exclusion in a different form. A firm operating partly in cash can have a sound business and limited conventional evidence. Other firms may generate digital turnover while facing low margins and slow collections. A credible underwriting process distinguishes those cases rather than treating all cash transactions as weak or all digital sales as strong. Check whether staff can explain the basis for a lower loan amount or a rejection. That information can help the borrower improve its application and the regulator see which constraints remain binding.

Watch what happens around the threshold

One risk is that lenders cluster loans just below ₹20 lakh even when the firm needs somewhat more. An applicant could receive cheaper or easier access to the first portion of funding while having to finance the rest elsewhere. The firm’s effective cost then depends on both loans and the timing of each. A distribution of sanctioned amounts can reveal bunching, but interpreting it requires comparing the amounts firms asked for and the available alternatives. Some concentration near the threshold may reflect a genuine demand for those loan sizes. RBI amendment to the micro and small enterprise lending directions

The strongest argument for a higher limit is that security requirements can lock capable first-time borrowers out, even when a lender could assess and manage the risk. The strongest qualification is that a guarantee or a different lending rule can reduce one financing obstacle without improving a weak business’s prospects. The useful comparison is how lenders treat applicants with similar expected repayment but different access to assets. A rise in approvals for previously excluded viable firms, with sustainable terms and manageable losses, would show that the change reached the intended margin. RBI amendment to the micro and small enterprise lending directions · RBI’s summary of the collateral-free lending amendment

An additional question is which uses of credit benefit. Working capital for a confirmed order may be easier to assess than an investment with an uncertain return. If banks expand primarily the first category, the reform could improve routine finance while leaving the capital expenditure constraint largely intact. Report loan purpose and maturity alongside approvals. Compare whether a firm that previously borrowed informally now receives enough bank credit at the right time to carry out its plan. The number of new loan accounts is useful only in conjunction with the amount and conditions on which the money arrives.

Because the change applies to new sanctions or renewals from April, an evaluation should follow cohorts from the relevant decision date and allow for the time needed to see repayment. RBI amendment to the micro and small enterprise lending directions

A credit-access test that can distinguish the outcomes

Follow applications, approval rates, pricing, sanctioned amounts, time to disbursement, first-time borrowers and later repayment. Compare loans just below and above relevant thresholds cautiously because firms and lenders can adjust the requested amounts. It would also help to separate first-time applications from renewals, where a bank may already know the borrower. If approvals rise among viable firms without a sharp deterioration in terms or performance, the change has widened access. If loans become smaller or more expensive while approvals barely move, the next task is to identify whether screening, guarantees or another part of the lending process is limiting results. RBI amendment to the micro and small enterprise lending directions · RBI’s summary of the collateral-free lending amendment