business loan secured or unsecured​

India’s Business Lending Landscape: Navigating Secured vs. Unsecured Finance Options

By Amrita Patel, Senior Financial Analyst with 15 years of experience covering Indian banking and MSME financing sectors

Let’s face it – in today’s fast-changing Indian economy, getting the right business funding can make or break your entrepreneurial journey, whether you’re running a small manufacturing workshop or launching the next big tech startup. With our MSME sector powering nearly 30% of the country’s GDP (according to the Ministry’s Annual Report 2024-25), more business owners than ever among India’s 63.4 million small enterprises are trying to figure out whether secured or unsecured loans make more sense for their situation (MSME Ministry Census, December 2024).

Secured Business Loans: Traditional Backbone of Indian Commercial Finance

So what’s the deal with secured loans? They’re still the heavyweight champion in India’s lending arena. You put up something valuable as collateral – maybe your property or equipment – and in return, you get better terms. According to the Reserve Bank of India’s “Report on Trend and Progress of Banking in India 2024” (published February 2025), these secured loans make up a whopping 78% of all business lending across the country. Simply put, our banks still love having that safety net.

“Look, it’s pretty straightforward from our perspective,” says Rajesh Kumar, Chief Credit Officer at State Bank of India. “When businesses offer collateral, we can sleep better at night and pass on the benefits through lower interest rates and longer repayment windows. This makes particular sense in our market, where businesses face more ups and downs than you might see in places like Europe or America.”

Take Precision Engineering Works in Pune – they’re a perfect a example. This manufacturing company managed to snag a ₹2.5 crore expansion loan by putting up their factory and equipment as collateral. Their rate? A reasonable 8.75% with a comfortable 7-year runway to pay it back. Had they gone the unsecured route, they would’ve been staring at eye-watering rates between 14-16% and scrambling to repay everything within just 3 years. Quite a difference!

What Can You Use as Collateral?

Here’s what Indian businesses are putting on the line, according to the Indian Banks’ Association (IBA) 2024 Annual Banking Trends Survey:

Even with all the economic jitters we’ve seen lately, secured lending isn’t just surviving – it’s thriving. The Federation of Indian Chambers of Commerce & Industry (FICCI) Banking Survey 2024 (published December 2024) found an impressive 18% year-over-year growth in secured MSME lending through March 2024.

Dr. Raghuram Krishnan from IIM-Ahmedabad puts it in perspective: “There’s something deeply rooted in our financial culture here. Indian lenders have always been cautious, and we’ve grown up believing that owning property equals stability. These two forces shape our lending landscape more than we realize.”

Unsecured Business Loans: The Digital Revolution Changing the Game

But here’s where things get interesting – the unsecured lending world is going through nothing short of a revolution. Thanks to our fintech boom and government initiatives like UPI and India Stack, businesses can now access loans without pledging family silver (or factory equipment).

What’s This Account Aggregator Thing Everyone’s Talking About?

Ever wondered how lenders might evaluate you without asking for a mountain of paperwork? Enter the Account Aggregator (AA) framework. It’s like a secure digital courier for your financial information. With your permission, it lets banks and lenders see your banking history, GST returns, and even utility payment records – all digitally verified and without you having to print a single document or stand in any queues. The RBI oversees this system to ensure your data stays protected while making lending decisions faster and more accurately.

“Think about it – your business leaves digital footprints everywhere,” explains Priya Sharma, who heads fintech lender LoanTap. “Your GST filings, banking transactions, and online sales – they all tell a story about your business health. Our algorithms make sense of these patterns in ways traditional bankers never could.” She adds proudly, “Last year alone, we crunched over 20 million data points from 50,000 small businesses and delivered ₹850 crore to entrepreneurs who would’ve heard ‘no’ from every traditional bank they approached.”

What’s been happening lately in this space?

• SIDBI (yes, the government-backed Small Industries Development Bank) jumped into the game with their MSME Accelerator Program last August, making unsecured credit available to businesses that traditionally struggled to qualify
• The Account Aggregator system I mentioned earlier? It’s now connecting 28 major financial institutions as of March this year, making your data work for you instead of against you
• Even e-commerce giants like Flipkart and Amazon are getting in on the action – they pumped ₹12,000 crore into their small sellers last financial year through supply chain financing (basically, helping sellers get paid faster)

Real People, Real Impact: How Digital Loans Are Changing Lives

Meet Sunita Devi, who runs Bharat Handlooms in Varanasi. Her story might sound familiar to many business owners: “For eight years, we turned a profit and did everything right. But every time I approached a bank, they’d ask about property papers we simply didn’t have.” Her game-changer? A fintech app that looked at her digital sales history and GST compliance instead. “They gave us a ₹15 lakh equipment loan that doubled what we could produce. And the kicker? Five days from application to money in our account – not the three months the bank wanted!”

The Urban-Rural Divide: Not All of India Gets the Same Deal

Here’s where things get complicated – where your business is located makes a huge difference in what financing options you’ll find. According to the MSME Finance Outlook Survey 2024 (conducted by TransUnion CIBIL and SIDBI), if you’re in Mumbai, Bengaluru, or Delhi NCR, about 41% of the business loans around you are unsecured. The percentages become even lower when you operate in a tier-2 or tier-3 location within the city. Statistics show that only 18% of business credit becomes accessible without collateral requirements, while the remaining 82% still require it.

“The urban-rural divide in financing options represents one of our greatest challenges,” states Vikram Mehta, Director at the Confederation of Indian Industry. “While digital lending has made inroads, relationship-based secured lending through local bank branches remains the primary channel in much of non-urban India. This creates inherent disadvantages for businesses in these regions, limiting their growth potential compared to urban counterparts.”

The RBI’s Internal Working Group on Digital Lending (January 2025) has recommended special measures to bridge this gap through targeted financial literacy programs and technological infrastructure development in underserved regions.

Regulatory Framework and Recent Changes

The Indian regulatory environment has evolved significantly, with the RBI implementing new frameworks to balance innovation with stability:

• Introduction of the co-lending model through the Master Direction on Co-Lending by Banks and NBFCs to Priority Sector (revised March 2024), enabling banks and NBFCs (Non-Banking Financial Companies) to partner in extending credit
• Stricter digital lending guidelines implemented through the Framework for Digital Lending (September 2023) to protect borrowers from predatory practices
• Priority sector lending requirements incentivize banks to extend credit to underserved segments, with revised targets announced in the RBI Circular FIDD.CO.Plan.BC.5/04.09.01/2024-25 dated April 7, 2024

The Securities and Exchange Board of India (SEBI) has also introduced new disclosure requirements for listed entities engaged in lending businesses through its circular SEBI/HO/CFD/CMD/CIR/P/2024/47 dated March 12, 2024, enhancing transparency for investors.

“The regulatory approach has matured, recognizing both the need for credit expansion and consumer protection,” observes Anand Srinivasan, former Executive Director at the RBI. “This balanced approach supports healthy growth in both secured and unsecured lending channels while addressing concerns about overleveraging in certain sectors.”

The Role of Government Initiatives

Government programs have significantly influenced India’s business financing ecosystem through targeted interventions:

Emergency Credit Line Guarantee Scheme (ECLGS)

Introduced during the pandemic and subsequently extended through December 2024, the ECLGS provided ₹5 trillion in guaranteed unsecured lending to MSMEs. According to the Ministry of Finance Economic Survey 2024-25, this initiative prevented an estimated 1.5 million business closures and preserved approximately 6 million jobs across the manufacturing and service sectors.

 The Credit Guarantee Fund Trust for Micro and Small Enterprises operates as a financial institution to facilitate loans.

This program continues offering partial guarantees for unsecured loans to qualifying businesses, with 127,834 guarantees approved in FY 2023-24 according to the CGTMSE Annual Report. The scheme’s impact has been particularly significant in manufacturing, with 62% of guarantees supporting small-scale industrial units.

“Without the CGTMSE guarantee, our business would never have qualified for the working capital we needed to fulfill our first major export order,” explains Rajan Patel, founder of GreenTech Solutions, a renewable energy components manufacturer in Gujarat. “The guarantee enabled us to secure ₹45 lakhs in unsecured financing that helped us scale operations and eventually employ 25 additional workers.”

MUDRA (Micro Units Development and Refinance Agency)

The MUDRA scheme provides tiered financing options primarily on an unsecured basis to micro-enterprises, structured in three categories:

Source: MUDRA Annual Report 2023-24

Risks and Challenges in Business Lending

Potential Pitfalls of Secured Loans

While secured loans offer advantages in terms of interest rates and loan amounts, they carry significant risks:

• Asset Loss Risk: According to Indian Banks Association data, approximately 24,000 MSME properties were repossessed in 2023-24 following loan defaults
• Valuation Discrepancies: Many businesses report significant gaps between their perception of collateral value and bank valuations, often ranging 25-30% lower than market expectations
• Operational Impact: Pledging essential business assets can limit operational flexibility and future financing options

Risks Associated with Unsecured Loans

The unsecured lending space presents its challenges:

• Higher Cost of Funds: Average interest rate differential between secured and unsecured business loans ranges from 6% to 9% according to RBI data
• Predatory Lending Concerns: The Digital Lenders Association of India reported 1,245 complaints regarding misleading terms and hidden charges in 2024
• Short Repayment Windows: Typical unsecured loan terms of 12-36 months can create cash flow pressure during economic downturns

Addressing Complaints and Disputes

The RBI’s Integrated Ombudsman Scheme, launched in 2021 and expanded in 2024, provides a unified mechanism for addressing borrower grievances. In FY 2023-24, the Ombudsman resolved 8,762 business loan-related complaints, with average resolution time improving to 27 days from 41 days in the previous year.

Dr. Meenakshi Rajagopalan, consumer finance protection advocate and author of “Fair Lending Practices in Indian Markets,” recommends: “Business borrowers should carefully document all communications with lenders, verify all charges against the original loan agreement, and promptly escalate concerns to the bank’s nodal officer before approaching the Ombudsman.”

Making Informed Financing Decisions

For Indian business owners, several factors demand consideration when choosing between secured and unsecured financing:

Key Decision Factors with Practical Guidelines

“Businesses must evaluate not just interest rates but processing times, flexibility of terms, and impact on future borrowing capacity,” advises Sanjay Nayar, former CEO of KKR India. “Businesses often find success by implementing secured long-term capital alongside unsecured working capital facilities as their ideal financial structure. We’ve seen numerous mid-sized enterprises thrive using this hybrid approach, particularly in sectors with seasonal demand patterns.”

Identifying Responsible Lenders

To avoid predatory lending practices, business owners should verify:

1. Regulatory Status: Confirm the lender is registered with the RBI (for NBFCs) or is a scheduled commercial bank
2. Transparent Disclosure: Clear documentation must exist for every fee and charge and preprocessing penalty
3. Digital Footprint: Check customer reviews and complaint history through platforms like Consumer Reports Complaints and the RBI’s complaint portal
4. Clear Documentation: Legitimate lenders provide comprehensive loan agreements with all terms clearly stated

Future Trends in Indian Business Lending

Looking ahead, several trends are reshaping India’s business financing landscape:

• Embedded Finance Integration: Point-of-sale systems and e-commerce platforms increasingly offer instant financing at transaction points
• Blockchain-Based Verification: Emerging solutions for immutable credit histories and faster KYC verification
• Alternative Data Utilization: Telecom payment history, utility bills, and social media presence are being incorporated into lending algorithms
• Sustainability-Linked Loans: Growing adoption of financing tied to environmental and social governance metrics

“The next frontier in Indian business lending will be hyperlocalized, sector-specific credit models that understand the unique cash flow patterns of different industries,” predicts Dr. Arundhati Bhattacharya, former SBI Chairperson and fintech advisor. “We’re already seeing early adoption in agriculture and retail sectors, with promising results in terms of both access and repayment performance.”

Conclusion and Actionable Steps

As India continues its ambitious economic growth trajectory, the financing ecosystem supporting its business sector remains crucial to sustaining momentum and ensuring inclusive development across its diverse entrepreneurial landscape.

Business owners seeking optimal financing should:

1. Assess Business Cycle: Match financing type to your specific business stage and revenue predictability
2. Improve Digital Presence: Establish strong digital banking, GST, and business transaction records
3. Diversify Financing Sources: Consider a combination of traditional and alternative lending sources
4. Plan Ahead: Begin the financing process well before funds are critically needed
5. Seek Expert Guidance: Consult with financial advisors who specialize in MSME financing

By understanding the evolving landscape of secured and unsecured business lending options, Indian entrepreneurs can make strategic choices that support sustainable growth while managing financial risk appropriately.

About the Author: Amrita Patel holds an MBA in Finance from the Indian Institute of Management, Bangalore, and has spent 15 years analyzing Indian banking and MSME financing trends. She previously served as a policy advisor with the Department of Financial Services and has published extensively on financial inclusion and SME growth strategies.