RBI’s Master Direction on Lending to the MSME Sector sets the core numbers: no collateral on loans up to ₹20 lakh to micro and small enterprises (MSEs), a credit decision within 14 working days on MSE loans up to ₹25 lakh, and composite loans of up to ₹1 crore through a single window. The ₹20 lakh limit applies to MSE loans sanctioned or renewed on or after April 1, 2026.
The Direction (FIDD.MSME & NFS.12/06.02.31/2017-18, updated as on February 9, 2026) applies to all scheduled commercial banks, excluding regional rural banks. Other lender types should check the directions written for them.
Who counts as micro, small or medium
The Direction uses Gazette Notification S.O. 1364 (E) dated March 21, 2025. An enterprise has to stay within both limits for a category.
| Category | Investment in plant and machinery or equipment, not above | Turnover, not above |
|---|---|---|
| Micro | ₹2.5 crore | ₹10 crore |
| Small | ₹25 crore | ₹100 crore |
| Medium | ₹125 crore | ₹500 crore |
Three classification points affect priority sector lending (PSL), the RBI framework of lending targets for specified sectors (paras 2.2 to 2.4):
- For PSL, banks go by the classification recorded in the Udyam Registration Certificate.
- Retail and wholesale trade count as MSMEs only for PSL.
- Informal micro enterprises holding a Udyam Assist Certificate are treated as micro enterprises for PSL.
Sanction and structuring norms
Check the Covers column first. Most of these numbers apply to MSEs, not medium enterprises.
| Norm | What the Direction says | Covers | Wording | Para |
|---|---|---|---|---|
| Collateral-free limit | No collateral security on loans up to ₹20 lakh | MSE units | Mandated | 4.1 |
| PMEGP units | Collateral-free loans up to ₹20 lakh | All units financed under the Prime Minister Employment Generation Programme, administered by KVIC | Advised | 4.1 |
| Higher collateral-free limit | Can go up to ₹25 lakh under internal policy, based on good track record and financial position | MSE units | May | 4.1 |
| Gold and silver | A voluntary pledge on loans within the collateral-free limit is not a violation | Borrowers pledging voluntarily | Clarification | 4.1 |
| Credit guarantee | Banks can use Credit Guarantee Scheme cover where applicable | Not limited further in para 4.1 | May | 4.1 |
| Composite loan | Limit of ₹1 crore for working capital and term loan needs through a single window | MSE entrepreneurs | Can be sanctioned | 4.2 |
| General Credit Card | Eligible banks can issue it to those sanctioned working capital for non-farm entrepreneurial activity that qualifies as priority sector. Terms follow Board-approved policy, and collateral-free norms for micro and small units apply | Individuals and entities as described | May | 4.3 |
| Life cycle provisions | Lending policy must include standby credit on term loans, additional working capital for emergent needs, and mid-term review of regular working capital limits | Viable MSE borrowers | Shall | 4.4 |
| Scoring model | Consider the Working Group on Rehabilitation of Sick SMEs recommendation to lend on a scoring model, up to the advance size given in para 6.3 | Credit to the MSE sector | Advised to consider | 6.3 |
| Sub-limit for MSME payables | Fix a sub-limit within overall working capital limits for paying for purchases from MSMEs | Large borrowers | Advised | 5.6 |
The Direction does not set a collateral rule for loans above these limits or for medium enterprises in para 4.1. Collateral policy above the limits varies by institution.
Decision and process norms
| Norm | What the Direction says | Covers | Para |
|---|---|---|---|
| Decision timeline | Not more than 14 working days | MSE loans up to ₹25 lakh | 4.4 |
| Timeline above ₹25 lakh | Board-approved sanction time norms, which vary by institution | MSE loans above the limit | 4.4 |
| Application tracking | Credit Proposal Tracking System (CPTS) or equivalent, with central registration, e-tracking, an automatic acknowledgement and a unique serial number, for physical and online applications. Acknowledgement and status go to the applicant automatically | All MSME loan applications | 4.7 |
| Document checklist | Indicative checklist given at the time of applying | MSME borrowers | 4.7 |
| Rejection | Main reason or reasons conveyed in writing, within Board-approved sanction time norms | MSME borrowers | 4.7 |
| Pendency monitoring | Disposal and pendency beyond sanction time norms monitored quarterly, and displayed on the website in the Annex I format within one month from the end of the preceding quarter | Loan applications. This item names no borrower group, and para 4.7 is headed and introduced as being about the MSE sector | 4.7 |
| Website disclosure | Credit information, including timelines and an indicative document checklist, under a separate prominent tab | MSMEs | 4.4 |
| Performance MIS | System-driven management information at branch and supervisory levels, with periodic Board review of credit flow | MSE sector | 4.7 |
Portfolio and stress norms
| Norm | What the Direction says | Covers | Para |
|---|---|---|---|
| PSL targets | Banks follow the targets and sub-targets in the Priority Sector Lending Directions, 2025. The MSME Direction does not restate the figures | MSME sector | 3.1 |
| Credit growth | 20% year-on-year growth in credit | Micro and small enterprises | 3.2 |
| Account growth | 10% annual growth in the number of accounts | Micro enterprises | 3.2 |
| Micro share | 60% of total MSE lending to micro enterprises, as of the corresponding quarter of the previous year | MSE sector | 3.2 |
| Revival framework | Revival and rehabilitation under the framework issued on March 17, 2016 | MSME units with loan limits up to ₹25 crore | 4.6 |
| Early stress | Incipient stress identified through three sub-categories under the Special Mention Account (SMA) category before the account turns non-performing. Any MSME borrower can also initiate proceedings voluntarily | MSME accounts under the framework | 4.6 |
| Board-approved policies | Loan policy, restructuring or rehabilitation policy, and a non-discretionary One Time Settlement scheme, which has to be publicised | MSE sector | 4.5 |
The growth and micro-share numbers come from the Prime Minister’s Task Force recommendations, and banks are advised to achieve them. They are portfolio goals, not conditions on a single loan.
Delayed payment rules that affect the credit read
Para 5.6 summarises the delayed payment provisions of the MSMED Act, 2006:
- A buyer pays on or before the date agreed in writing, or before the appointed day if there is no agreement.
- The agreed period cannot exceed 45 days from acceptance or deemed acceptance.
- A buyer who fails to pay owes the supplier compound interest with monthly rests, at three times the Bank Rate notified by RBI.
- Disputes go to the Micro and Small Enterprises Facilitation Council set up by the State Government.
In working practice, this gives a reason to look at both sides of the trade cycle: receivable days on an MSME supplier, and how a large borrower’s limits cover its MSME payables.
Worked example, made-up numbers
Five proposals at a scheduled commercial bank, all sanctioned after April 1, 2026.
| Proposal | Facts | How the norms read |
|---|---|---|
| A | Micro unit, ₹15 lakh term loan | No collateral security, apart from any gold or silver pledged voluntarily. Decision within 14 working days |
| B | Small unit, ₹22 lakh working capital, good track record | Above the mandated limit. The bank may dispense with collateral under its internal policy. Decision within 14 working days |
| C | Small unit, ₹50 lakh term loan plus ₹20 lakh working capital | ₹70 lakh fits the ₹1 crore composite limit. Timeline follows Board-approved norms |
| D | Medium unit, ₹3 crore term loan | MSE collateral, composite and 14-day norms do not apply. CPTS, checklist and written rejection reasons do |
| E | Investment ₹20 crore, turnover ₹120 crore | Investment fits small, but turnover is above ₹100 crore, so the unit falls under medium. For PSL, read the Udyam certificate |
Pitfalls
- Mixing up similar thresholds. ₹20 lakh is the mandated collateral-free limit. ₹25 lakh is both the optional collateral waiver and the 14-day cut-off. ₹25 crore is the revival framework’s limit.
- Applying MSE norms to medium units. The collateral, composite loan and 14-day norms are written for MSEs. The application tracking, checklist and rejection norms are written for MSMEs.
- Testing only one classification limit. A low investment figure does not settle the category if turnover is above the limit.
- Ignoring renewals. The 2026 amendment covers MSE loans sanctioned or renewed on or after April 1, 2026, so a renewal needs checking as well as a fresh sanction.
- Assuming how facilities add up. Para 4.1 refers to loans up to the limit and does not spell out how several facilities to one unit are counted. Check your institution’s policy.
- Using old notes. Para 6.5 was deleted by the February 9, 2026 amendment, and the collateral numbers in older notes may be out of date.
- Reading retail and wholesale trade as MSME for every purpose. Their inclusion is limited to PSL.
Sanction note checklist
- Lender is a scheduled commercial bank other than a regional rural bank.
- Category tested on both investment and turnover, and Udyam certificate on file for PSL.
- Sanction or renewal date checked against April 1, 2026.
- Collateral position stated against the ₹20 lakh limit, and any waiver up to ₹25 lakh tied to internal policy.
- Any gold or silver pledge recorded as voluntary.
- Credit Guarantee Scheme cover considered where applicable.
- Composite route considered where working capital and term loan needs are combined, within ₹1 crore.
- Application date and decision date tracked against the 14-working-day or Board-approved norm.
- Standby credit and additional working capital considered under the bank’s life cycle policy.
- For large borrowers, the sub-limit for MSME payables addressed.
- For a rejection, main reasons conveyed in writing within sanction time norms.
Sources
- Reserve Bank of India (Priority Sector Lending – Targets and Classification) Directions, 2025, rbi.org.in, accessed 2026-11-06