The Reserve Bank of India (RBI) has issued an important clarification regarding collateral norms for agriculture and MSME loans. According to the latest guidelines, if a borrower voluntarily pledges gold or silver for a loan, it will not be considered a violation, even in cases where loans are categorized as “collateral-free.”
RBI made it clear that the act of pledging assets like gold or silver must come solely from the borrower’s willingness, not due to any coercion or condition imposed by the bank.
Here are key takeaways from the RBI clarification:
1. Even for collateral-free loans up to Rs 10 lakh, if the borrower voluntarily offers to pledge gold or silver, it is permitted under RBI rules.
2. The RBI emphasised that collateral should never be a bank-mandated requirement in such cases; it must be a borrower-led decision.
3. Existing collateral-free loan guidelines for the Agriculture and MSME sectors remain unchanged.
4. Under the Prime Minister’s Employment Generation Programme (PMEGP), loans up to Rs 10 lakh must also be granted without insisting on collateral.
5. Micro and Small Enterprises (MSEs) with a strong repayment track record may be eligible for collateral-free loans up to Rs 25 lakh, subject to RBI approval.
6. In agriculture loans, exemptions up to Rs 2 lakh are applicable, even for allied activities like dairy, poultry, and fisheries.
These updated norms will apply to all commercial banks, regional rural banks (RRBs), small finance banks (SFBs), and cooperative banks.
However, it’s important to note that the relaxation around collateral-free lending does not apply to RRBs and cooperative banks, meaning they are not obligated to follow the voluntary collateral model for such loans.
This move by the RBI is seen as a borrower-friendly measure, promoting financial inclusion while ensuring that banks do not misuse their authority to demand collateral where it is not mandated.
