Twenty lakh rupees.
For micro and small enterprises across India, that number now has a direct connection to collateral-free lending. Under the latest RBI lending direction, banks cannot accept collateral security for loans up to ₹20 lakh to micro and small enterprises.
Yet collateral-free lending is not built around a single programme. Several government initiatives support it, each designed for a different type of business and borrowing need. Some provide a credit guarantee to the lender, some offer loans through dedicated programmes, while others combine credit with a subsidy or other support.
So, instead of looking at these as just another list of government schemes, let’s look at six things MSMEs should know when exploring collateral-free credit.
CGTMSE: The Guarantee Behind the Loan
Collateral is not the only way a lender can get support for a loan. Under CGTMSE, that support comes through a credit guarantee.
The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), set up by the Ministry of MSME and SIDBI, provides guarantee cover to lenders for qualifying credit facilities. If a borrower defaults, the guarantee covers a part of the lender’s loss. This allows the lender to offer credit without requiring collateral or a third-party guarantee from the MSE.
The scheme covers credit facilities of up to ₹10 crore for micro and small enterprises, including those engaged in trading. Guarantee coverage ranges from 75% to 90%, depending on the borrower category. The Annual Guarantee Fee starts at 0.37% per annum following the revision effective from 1 April 2025. Concessions are available for certain borrower categories, locations and ZED certified units.
There is one important detail about accessing the scheme: CGTMSE does not lend directly to the borrower. The application goes to a participating bank or NBFC, known as a Member Lending Institution. The lender assesses the application and applies for guarantee cover where applicable. A valid Udyam Registration Number is required to obtain the cover.
In short, CGTMSE does not replace the loan or the lender’s assessment. It adds guarantee support to the lending process, making it one of the key government-backed routes for collateral-free credit to MSEs.
MUDRA: Collateral-Free Loans from ₹50,000 to ₹20 Lakh
For micro enterprises, the Pradhan Mantri MUDRA Yojana is among the most direct routes to a collateral-free business loan. Here is how it makes that possible.
No collateral is required. A MUDRA loan does not require property, gold, or a guarantor. The loans are covered through the Credit Guarantee Fund for Micro Units (CGFMU), with the National Credit Guarantee Trustee Company acting as trustee. If a borrower defaults, the guarantee covers part of the lender’s loss, providing support to the lender.
The loan amount depends on the category. Shishu covers loans up to ₹50,000, Kishor covers amounts above ₹50,000 and up to ₹5 lakh, and Tarun covers amounts above ₹5 lakh and up to ₹10 lakh. Tarun Plus takes the limit up to ₹20 lakh for borrowers who have successfully repaid an earlier Tarun loan.
Who can use it? The scheme covers non-farm micro enterprises in manufacturing, trading and services, along with activities allied to agriculture such as dairy, poultry and beekeeping. Loans can be used for business purposes including working capital and the purchase of equipment or machinery.
The higher limit comes with a repayment condition. Tarun Plus is not available to a first-time borrower. The borrower must have successfully repaid a previous Tarun loan before moving into this category. This makes repayment history an important part of accessing the highest MUDRA loan level.
Where can you apply? Applications can be made through public and private sector banks, regional rural banks, small finance banks, NBFCs and microfinance institutions. The lender still assesses the application and repayment capacity before sanctioning the loan, so keeping KYC, bank statements, Udyam registration, and other relevant business documents ready is important.
If you are comparing MUDRA with PMEGP, the IRIS MSME guide on PMEGP vs MUDRA loans can help you understand how the two differ.
PMEGP: Turning the Subsidy Into a Smaller Loan
PMEGP brings a bank loan and a government subsidy, known as margin money, together for new micro enterprises. The subsidy forms part of the project financing, which can keep the bank loan within the collateral-free lending limit.
Take a special category applicant in a rural area setting up a food processing unit with a project cost of ₹20 lakh. At a 35% subsidy, the margin money comes to ₹7 lakh. The applicant contributes 5%, or ₹1 lakh, while the remaining ₹12 lakh comes from the bank as a term loan. Since PMEGP units are covered by the RBI’s collateral-free provision up to ₹20 lakh, the ₹12 lakh loan falls within that limit.
The subsidy rate depends on the applicant category and location. General category applicants receive 15% in urban areas and 25% in rural areas. For special category applicants, the rate is 25% in urban areas and 35% in rural areas. The subsidy is not paid to the applicant as cash. Instead, the bank keeps the margin money in a term deposit for the prescribed lock-in period.
A few conditions apply. PMEGP is meant for new ventures, while existing businesses cannot use the scheme simply to expand. The maximum project cost is ₹50 lakh for manufacturing and ₹20 lakh for service units. Applicants must be at least 18 years old, and projects above ₹10 lakh in manufacturing or ₹5 lakh in service require the applicant to have passed Class 8.
Applications are made through the official PMEGP portal along with a project report. The 15-day Entrepreneurship Development Programme is also part of the process and can be completed online.
PM Vishwakarma and PM SVANidhi: Credit for Artisans and Vendors
For artisans with traditional skills: PM Vishwakarma covers 18 traditional trades, including carpenters, potters, blacksmiths, tailors and goldsmiths. The scheme provides collateral-free credit in two stages: ₹1 lakh in the first tranche and ₹2 lakh in the second, at a concessional interest rate of 5%, with government guarantee support.
The second tranche comes after repayment of the first loan and meeting the scheme’s digital transaction condition. Artisans must be at least 18 years old, work in one of the listed trades, and register through the PM Vishwakarma system.
For street vendors building their business one loan at a time: PM SVANidhi provides collateral-free working capital credit in three stages. The first loan goes up to ₹15,000 for 12 months, the second up to ₹25,000 for 18 months, and the third up to ₹50,000 for 36 months. Each higher tranche follows full repayment of the previous loan.
There is an added benefit for repayment: borrowers who repay on time receive an interest subsidy for timely repayment as prescribed under the scheme. Applications can be made through the PM SVANidhi portal, a Common Service Centre or a lending bank. The lending period has been extended until 31 March 2030.
For an artisan, the support is tied to the tools and skills behind the work. For a street vendor, it follows the business from one loan stage to the next. Both approaches show how government credit schemes can respond to the way different small businesses actually work, while keeping access to finance open without a collateral requirement.
The ₹20 Lakh Provision: Where It Fits
The ₹20 lakh figure is not a separate loan scheme. It comes from an RBI lending direction for micro and small enterprises, which raised the earlier collateral-free lending limit from ₹10 lakh. The revised provision applies to loans sanctioned or renewed from 1 April 2026.
This provision and government schemes such as CGTMSE work differently. The RBI direction tells banks when collateral cannot be accepted, while CGTMSE provides guarantee cover to lenders for qualifying credit. A loan does not need CGTMSE cover for the RBI’s ₹20 lakh collateral-free provision to apply.
Banks can also extend collateral-free lending up to ₹25 lakh based on an MSE’s track record and financial position, subject to their internal policy. Units financed under PMEGP also come under the ₹20 lakh provision.
One important distinction: this RBI provision covers micro and small enterprises, not medium enterprises. With that in mind, let’s look at the government schemes that provide additional support for collateral-free credit.
Three Things Lenders Check Before Saying Yes
Once collateral is out of the picture, the lender has to look more closely at the business itself. Three questions come into focus when assessing a collateral-free loan application.
“Does the business fall under the micro or small category?” The RBI’s ₹20 lakh provision and CGTMSE cover apply to micro and small enterprises, so the category shown in your Udyam registration is important. Under the revised MSME definition from April 2025, a micro enterprise can have investment of up to ₹2.5 crore and turnover of up to ₹10 crore. For a small enterprise, the limits are ₹25 crore in investment and ₹100 crore in turnover. If your business has moved into a different category, update the Udyam details before applying.
“Can the business repay the loan?” This is where your financial records come into the picture. Bank statements, income tax returns, and GST returns for registered businesses give the lender a view of sales and financial activity. Regular GST filing also forms part of this assessment. The GSTIN check on the IRIS Peridot app lets you review your business details before making an application. IRIS Peridot also facilitates collateral-free business loans of up to ₹75 lakh through RBI-registered lending partners with a single digital application.
“What does the past borrowing record look like?” Credit history gives the lender another way to assess a borrower when there is no collateral involved. Your credit score, previous loans, and repayment record all form part of this picture. A history of regular repayments can support the application, while missed or overdue payments can affect how the lender views the request.
Looking Beyond Collateral
Government support for collateral-free lending is not built around one scheme or one type of borrower. It brings together different credit routes for micro and small enterprises, new ventures, artisans and street vendors, each with its own structure and purpose.
For someone exploring a loan without collateral, that wider landscape is important. The question is no longer only whether a loan is available without security, but which government-backed route applies to the borrowing need and what it offers alongside the credit.
That makes understanding these schemes the starting point for looking at collateral-free finance in a more informed way.
