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SME Lending in India

Part 03 — Products

Product Taxonomy

SME lending products in India are best understood by the risk being financed, not by the label on a lender’s brochure. A ₹20 lakh kirana overdraft, a ₹3 crore cash-credit limit for a packaging unit, a ₹1.5 crore machinery loan, a bill discounted on TReDS, and a ₹50 lakh bank guarantee can all sit under “MSME finance”, but they create different cash-flow, collateral, legal, monitoring and system requirements.

For regulated classification, start with the borrower. The current MSME thresholds are those in the RBI’s Master Direction - Lending to Micro, Small & Medium Enterprises (MSME) Sector, July 24, 2017, updated February 9, 2026: micro up to ₹2.5 crore investment and ₹10 crore turnover, small up to ₹25 crore and ₹100 crore, and medium up to ₹125 crore and ₹500 crore. For priority sector lending (PSL), banks use the Udyam Registration Certificate classification, and all bank loans to eligible MSMEs qualify under the MSME category of PSL under the RBI Priority Sector Lending Directions, March 24, 2025, updated January 19, 2026.

The Product Map

Section titled “The Product Map”
FamilyCommon namesFunded or non-fundedPrimary repayment sourceTypical Indian 2026 parameters
Unsecured business loanBL, digital business loan, GST loan, merchant loanFunded term loan or dropline overdraftBusiness cash flow; EMI or daily/weekly collections₹50,000-₹1 crore; 12-60 months; 10.75%-30% p.a.; 0%-4.72% fee
Working capital limitCash credit (CC), overdraft (OD), dealer OD, stock/receivable limitFunded revolvingConversion of inventory and receivables into cash₹5 lakh-₹100 crore; annual review; bank margins 20%-50% on stocks/debtors; floating benchmark rates
Term loanBusiness term loan, project loan, machinery/equipment financeFunded amortisingOperating surplus from the asset/project₹5 lakh-₹50 crore; 3-10 years; 9%-18% banks, higher for NBFCs; collateral or hypothecation
Loan against propertyLAP, mortgage loan, dropline OD against propertyFunded term/ODBusiness cash flow, with property as secondary exit₹10 lakh-₹50 crore; 7-15 years; 8.3%-13.5%; 45%-65% loan-to-value (LTV)
Receivable financeBill discounting, invoice discounting, factoring, TReDSFunded short tenorBuyer payment against accepted invoice₹25,000 invoice lots to multi-crore anchor programs; 30-180 days; discount usually buyer-risk linked
Supply-chain financeVendor finance, dealer finance, anchor-led payables/receivables financeFunded revolving or invoice-by-invoiceAnchor settlements, dealer collections, stock liquidation₹5 lakh-₹25 crore per counterparty; 30-180 days; recourse varies
Non-fund productsBank guarantee (BG), letter of credit (LC), co-acceptanceNon-funded contingent exposureApplicant performance/payment if invoked or crystallised0.5%-3% p.a. commission; cash margin 5%-25%; 3 months-10 years depending purpose
Scheme-linked productsCGTMSE, MUDRA/PMMY, PMEGP-linked credit, state subsidy loansFunded or non-fundedSame as underlying loan; guarantee/subsidy changes risk sharingCGTMSE cover up to ₹10 crore eligible credit; MUDRA up to ₹20 lakh

The first split is funded versus non-funded. A funded facility puts money out: term loan, working capital, bill discounting, LAP. A non-funded facility substitutes the bank’s credit for the customer’s cash: BG, LC, standby LC, co-acceptance. The borrower may not draw cash on day one, but the lender still books exposure, monitors limits, collects margin and commission, and holds capital.

The second split is secured versus unsecured. “Unsecured” in Indian SME practice rarely means no comfort at all. Lenders commonly take personal guarantees of promoters, Udyam/PAN/GST/bureau covenants, NACH mandates, hypothecation of current assets where the product permits, and sometimes a CGTMSE or CGFMU guarantee. “Secured” can mean primary security such as stock and receivables, movable fixed assets such as machines, immovable property mortgage, fixed deposits, or third-party collateral. The RBI MSME Master Direction currently mandates banks not to accept collateral security for MSE loans up to ₹20 lakh, with limited exceptions such as voluntarily pledged gold or silver not being treated as a violation of the collateral-free mandate (RBI MSME Master Direction, para 4.1).

Facility Shape Matters

Section titled “Facility Shape Matters”

A term loan has a disbursement date, repayment schedule, interest accrual, overdue tracking, prepayment rules and closure. A cash credit limit has sanctioned limit, drawing power (DP), stock statements, insurance, annual renewal, interest on daily outstanding and periodic cleanup expectations. A dropline overdraft behaves like a revolving limit whose available line reduces every month or quarter. A bill discounting facility may have invoice-level due dates and buyer-level concentration caps. A bank guarantee has no EMI, but if invoked it can become a funded loan immediately.

These differences drive system design. A loan origination system (LOS) can share borrower, KYC and document modules across products, but product configuration must store facility type, security type, amortisation method, interest reset, DP rules, limit expiry, review frequency, collateral coverage, guarantee cover and PSL tag separately.

Where Each Product Fits

Section titled “Where Each Product Fits”

For a micro retailer with ₹80 lakh GST turnover and thin collateral, a ₹15 lakh unsecured BL or MUDRA/CGFMU-linked loan may be the practical product. For a small manufacturer with ₹12 crore turnover, ₹1.8 crore inventory and ₹2 crore debtors, the right product is usually CC/OD assessed through turnover, MPBF or cash budget methods, covered in Working Capital. For a unit buying a ₹90 lakh CNC machine, a term/machinery loan should be matched to machine cash generation, subsidy eligibility and supplier disbursement controls, covered in Term & Machinery Loans. For a distributor serving an AA-rated anchor, receivable finance or dealer finance may beat generic working capital because the lender can underwrite the anchor payment cycle, covered in Invoice & Supply-Chain Finance.

There are also products that are mainly regulatory or scheme wrappers. CGTMSE is not a loan type; it is a guarantee cover over eligible collateral-free MSE credit. MUDRA is not a separate lender licence; it is a PMMY category for micro-enterprise loans originated by member lending institutions. These wrappers change eligibility, fee, guarantee claim and reporting fields, but the underlying facility still needs product discipline. See Guarantees, LC & Schemes.

Practical Product Parameters

Section titled “Practical Product Parameters”
Borrower segmentLikely product setRealistic exposure bandUsual underwriting anchor
Informal micro enterprise, Udyam Assist, non-GSTMUDRA Shishu/Kishor, micro BL, merchant advance₹50,000-₹10 lakhBank statement credits, bureau, field PD, UPI/POS settlements
GST-registered traderBL, dropline OD, GST-linked working capital, LAP₹5 lakh-₹2 croreGST returns, bank statement, bureau, stock/debtor cycle
Small manufacturerCC/OD, term loan, machinery finance, BG/LC₹25 lakh-₹10 croreCMA data, audited financials, stock/debtor DP, collateral
Anchor supplierInvoice discounting, factoring, TReDS, vendor finance₹5 lakh-₹25 croreAccepted invoices, anchor rating, dilution/default history
Contractor/infrastructure vendorBG, LC, bill discounting, project WC₹25 lakh-₹50 croreWork orders, RA bills, performance history, margin money

The bad practice is to force every borrower into the product easiest for sales to explain. The better practice is to map the facility to the asset being financed, then price for probability of default, loss given default, operating cost, cost of funds and scheme economics. That is why the next six pages separate unsecured business loans, working capital, term/machinery, LAP, receivables/supply-chain finance, and non-funded/scheme-linked products.

Sources

Section titled “Sources”