How a bank looks at your loan

01 The five Cs

Lenders across the world use the same five questions. Prepare an answer to each before you visit the branch.

• Character: your repayment history and credit score, and whether you are honest with the bank.
• Capacity: whether the business earns enough cash to pay the instalments.
• Capital: how much of your own money you are putting in.
• Collateral: property or deposits the bank can fall back on, where the rules allow it.
• Conditions: the state of your market, the loan purpose and the terms.

02 DSCR: can your cash pay the instalments?

DSCR (debt service coverage ratio) = (net profit + depreciation + interest on the term loan) ÷ (principal repayment + interest on the term loan), worked out for each year of the loan.

A DSCR of 1 means every rupee of cash goes to the bank, with nothing to spare. Many banks look for an average comfortably above 1, often around 1.5, but each bank sets its own norm, so ask yours.

03 Collateral: the RBI ₹20 lakh rule

RBI's Master Direction on lending to the MSME sector says banks must not accept collateral security for loans up to ₹20 lakh to units in the micro and small enterprise (MSE) sector. This higher limit applies to loans sanctioned or renewed from 1 April 2026; it was ₹10 lakh before.

Banks are also advised to give collateral-free loans up to ₹20 lakh to all units financed under PMEGP. A bank may, based on a unit's good track record and financial position, raise its collateral-free limit up to ₹25 lakh under its own board-approved policy.

To use this rule you should be an MSE, so register on the Udyam portal first. If a branch asks for collateral on an eligible loan of ₹20 lakh or less, ask them to show the rule they are following, and escalate to the bank's grievance cell if needed.

04 CGTMSE: guarantee instead of property

For larger loans, banks can cover the loan under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). If the borrower defaults, the trust pays a large part of the loss to the bank, so the bank does not need your property. The guarantee ceiling is ₹10 crore per borrower.

There is an annual guarantee fee, which the bank may pass on to you. The guarantee protects the bank, not you: you still owe the full loan.

• Bring: Udyam certificate, DPR, KYC, 6 to 12 months of bank statements, income-tax returns if any, quotations for machinery.
• Check your credit score before you apply and correct any errors.
• Ask for the Key Facts Statement and compare the total cost of the loan.