# RBI MSME lending norms: what the Master Direction asks of banks

> RBI MSME lending norms for scheduled commercial banks: collateral, credit decision timelines, composite loans and monitoring, as updated February 2026.

Source page: https://creditbrief.in/posts/rbi-msme-lending-norms
Published: 2026-11-06
Publisher: CreditBrief

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](https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11060), rbi.org.in, accessed 2026-11-06

Indicative only. Verify against your institution's policy.