TN removes need for collateral on loans below ₹4 lakh to widen credit reach

Collateral-free loans aim to make small borrowing simpler and safer for low-income households

In a significant move, Tamil Nadu has waived the need for collateral on small loans to make credit more accessible to low-income borrowers and women-led enterprises.

 

The change is part of the Tamil Nadu Money Lending Entities (Prevention of Coercive Action) Rules, 2025, which came into effect on November 19.

 

What has changed?

 

Under the new rules, borrowers seeking loans below Rs 4 lakh from registered moneylenders will no longer need to pledge assets or provide security. For members of self-help groups (SHGs), the collateral-free limit goes up to Rs 10 lakh. The move is designed to reduce barriers that often keep first-time or low-income borrowers out of the formal lending network.

 

Why does this matter for borrowers?

 

Collateral has historically been a pain point for small borrowers, especially women and informal-sector workers who may not own property or have a credit record. While banks offer unsecured loans, approval often hinges on credit history, existing relationships, or income documentation.

 

By easing the collateral requirement for private moneylenders, the state aims to give borrowers an alternative source of formal credit and reduce their dependence on informal lenders known for high interest rates and harsh recovery practices.

 

Additional safeguards introduced

 

The rules bring in a set of compliance and transparency obligations for registered moneylenders.

 

·  Mandatory return of security: If a lender has taken collateral for larger loans, it must be returned within 30 days of the borrower’s final repayment. 

·  Digital filing of records: Moneylenders must upload an annual statement for every financial year on a designated portal by September 30.

 

·  Long-term record-keeping: All lending-related documents must be maintained for a minimum of eight years.

 

These measures are intended to curb coercive recovery methods and enable better monitoring of lending activity across the state.

 

What borrowers should keep in mind?

 

While the relaxation broadens access to credit, borrowers still need to evaluate interest rates, repayment schedules, and any additional charges levied by individual lenders. The absence of collateral does not automatically guarantee low-cost borrowing.

 

For those starting small businesses or seeking to fund gig-related work, the changes could reduce reliance on informal credit and make it easier to access funds without risking personal assets.