The Reserve Bank of India (RBI) has made an important clarification for small businesses.
Banks can now accept gold or silver as security for loans up to Rs 20 lakh — but only if the borrower offers it voluntarily.
This does not violate the rule that such loans must be collateral-free.
The change was announced under the MSME Amendment Directions, 2026, issued on February 9, 2026.
It will apply to all MSE loans sanctioned or renewed on or after April 1, 2026.
What Has RBI Actually Changed?
Under current rules, banks cannot demand collateral for loans up to Rs 20 lakh given to micro and small enterprises (MSEs).
That rule still stands.
What RBI has clarified is this: if a borrower willingly pledges gold or silver for such a loan, it will not be considered a violation of the collateral-free lending rule.
In simple terms, banks cannot force you to give collateral.
But if you choose to offer gold or silver, they can accept it.
RBI has also allowed banks to extend collateral-free loans up to Rs 25 lakh based on the borrower’s repayment history and financial strength, as per their internal policies.
Credit guarantee cover can also be used where applicable.
Why This Matters for Small Businesses
Earlier, many banks avoided accepting gold or silver for MSME loans below Rs 20 lakh.
They feared it might be seen as breaking RBI’s collateral-free rule.
Because of this confusion, small business owners who were ready to pledge gold often had to take unsecured loans at higher interest rates. Some also faced delays in loan approval.
Now that RBI has cleared the confusion, small industries get more flexibility.
This is especially helpful for businesses that:
Do not own land or buildings
Need working capital frequently
Have household gold or silver but limited formal assets
Voluntarily pledging gold or silver can:
Improve chances of faster loan approval
Reduce interest costs
Strengthen the borrower’s credit profile
This could be a big relief for small manufacturers, traders and service providers.
How Banks Benefit Too
The change also helps banks manage risk better.
Even though banks cannot demand collateral up to Rs 20 lakh, voluntary gold or silver security lowers their credit risk.
This can improve loan quality and support responsible lending practices.
It creates a balance between borrower protection and financial safety for banks.
What Has Not Changed
RBI has made one thing very clear.
Collateral-free loans up to Rs 20 lakh remain a right of the borrower.
Banks cannot force MSMEs to pledge gold or silver.
Also, these loans are not the same as retail gold loans.
The money must be used strictly for business purposes.
Banks must continue following proper valuation and lending norms.
The Bigger Picture
By allowing voluntary gold and silver pledging within the collateral-free limit, RBI has removed confusion without weakening protections for small businesses.
The move is expected to:
Improve credit flow to small industries
Reduce dependence on informal lenders
Support growth of asset-light MSMEs
For India’s small businesses, this clarification could make accessing funds easier, faster and more affordable.
