Part 02 — RBI Regulatory Framework

PSL & Guarantee Schemes

Priority Sector Lending (PSL) and guarantee schemes are why many banks care about small-ticket SME credit even when branch economics are hard. PSL determines whether a loan helps the bank meet mandated sector targets; CGTMSE and CGFMU change the loss-given-default profile for eligible loans. They do not remove underwriting responsibility.

PSL Directions, 2025

The current anchor is the Master Directions - Reserve Bank of India (Priority Sector Lending - Targets and Classification) Directions, 2025, March 24, 2025, effective April 1, 2025. It superseded the 2020 PSL directions. The directions apply to commercial banks including Regional Rural Banks (RRBs), Small Finance Banks (SFBs), Local Area Banks (LABs) and Primary Urban Co-operative Banks other than salary earners’ banks.

For domestic scheduled commercial banks and foreign banks with 20 or more branches, the overall PSL target remains 40% of Adjusted Net Bank Credit (ANBC) or Credit Equivalent of Off-Balance Sheet Exposure (CEOBE), whichever is higher. Micro Enterprises have a 7.5% sub-target. Weaker sections have a 12% sub-target for domestic banks and foreign banks with 20 or more branches. SFBs have a higher overall PSL requirement under their licensing framework. Always check the exact bank category because target mechanics differ by bank type.

MSME lending can qualify as PSL when it fits the MSME classification and permitted activities. The classification itself is covered in MSME definition: micro, small and medium enterprises are classified by investment and turnover thresholds as notified by the Government of India and used by RBI for lending classification. Lenders typically insist on Udyam Registration for clean PSL tagging, though legacy and exception handling exists.

Why PSL Changes Product Design

PSL value is one reason banks partner with NBFCs, SFBs, fintech sourcing platforms and co-lending originators. A bank with low branch reach in semi-urban merchant clusters can use co-lending, assignment, direct assignment or on-lending routes where permitted. The product must still meet the PSL classification rule. A loan to a trader with Udyam may qualify; a loan to an NBFC for onward lending has separate rules; a personal loan to a proprietor that is actually used for business but booked as personal loan may not be PSL-clean.

Operationally, PSL tagging needs data fields: Udyam number, enterprise type, activity/NIC, investment, turnover, social category if relevant, geography, borrower constitution, product purpose, outstanding amount and date of classification. Audit teams will sample these fields. “SME” in CRM is not enough.

CGTMSE

The Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) is set up by the Ministry of MSME and SIDBI. It provides guarantee cover to Member Lending Institutions (MLIs) for collateral-free and third-party-guarantee-free credit to eligible Micro and Small Enterprises (MSEs), not directly to borrowers (CGTMSE home). As of March 31, 2025, CGTMSE reported cumulative guarantees approved of ₹9.34 lakh crore and 276 MLIs under CGS-I and CGS-II (CGTMSE).

Key current parameters verified from CGTMSE:

Item	Current rule/practice
Credit ceiling	Fund and non-fund based facilities up to ₹10 crore per eligible borrower can be covered; if credit exceeds ₹10 crore, guarantee cover is restricted to ₹10 crore (CGTMSE credit facilities FAQ).
Maximum risk borne	CGTMSE says maximum credit risk borne is ₹7.5 crore, i.e. 75% of amount in default, for the ₹10 crore ceiling case.
Coverage	General coverage often 75%; micro loans up to ₹5 lakh can get 85%; women entrepreneurs/MSE promoted by Agniveers 90%; SC/ST/PwD/aspirational district/ZED categories 85%; North East/J&K/Ladakh 80%, with ICDD additional 5% where applicable (CGTMSE about page).
Fee	Revised Annual Guarantee Fee from April 1, 2025 ranges from 0.37% p.a. for ₹0-10 lakh to 1.20% p.a. for above ₹8 crore-₹10 crore, before discounts/risk premium (CGTMSE fee structure).
Recent change	CGTMSE circulars dated March 18, 2025 increased guarantee ceiling from ₹5 crore to ₹10 crore and revised fee structure (CGTMSE circulars).

CGTMSE is not insurance against poor origination. The lender must lodge guarantee correctly, pay fees, avoid collateral/third-party guarantee except permitted hybrid security, classify NPA on time, issue recall/legal notices, and file claim within scheme rules. A CGTMSE-covered loan is also excluded from DLG under RBI’s Digital Lending Directions; the RE cannot stack a private 5% DLG on a loan covered by specified trust-fund guarantee schemes (RBI Digital Lending Directions, para 20).

MUDRA and CGFMU

Pradhan Mantri MUDRA Yojana (PMMY) loans are generally structured as Shishu (up to ₹50,000), Kishor (above ₹50,000 and up to ₹5 lakh), Tarun (above ₹5 lakh and up to ₹10 lakh), and Tarun Plus (above ₹10 lakh and up to ₹20 lakh for eligible borrowers with successful repayment history under Tarun). MUDRA loans are small enterprise/micro-business loans, not a separate RBI licence. They are originated by banks, NBFCs and MFIs under scheme rules and lender credit policy.

Credit Guarantee Fund for Micro Units (CGFMU) is administered through NCGTC and supports eligible micro-unit loans under PMMY. For system design, do not treat MUDRA as one product; store scheme category, guarantee eligibility, sanction amount, borrower segment, claim status and whether the facility is CGFMU-covered.

ECLGS Legacy

Emergency Credit Line Guarantee Scheme (ECLGS) was a COVID-era NCGTC guarantee programme. New originations under ECLGS are legacy by July 2026, but SME portfolios still contain ECLGS top-up loans with guarantee, tenor, moratorium and claim mechanics. Systems must keep ECLGS flags alive until maturity/closure because guarantee claims, restructurings, NPA treatment and audit evidence may survive long after the scheme stopped active sanction.