In a significant move to enhance financial inclusion, the Tamil Nadu government has abolished the requirement for collateral or security for loans below ₹4 lakh. This policy shift, designed primarily to assist lower-income groups, is part of the newly enacted Tamil Nadu Money Lending Entities (Prevention of Coercive Action) Rules, 2025.
Key Relaxations for Borrowers
The new regulations, which officially came into force on November 19, 2025, introduce two major relaxations. First, all loans under ₹4 lakh no longer require any form of collateral. Second, for members of self-help groups (SHGs), this security-free limit is extended to loans up to ₹10 lakh.
An official from the state finance department highlighted the transformative potential of these changes. "Both these relaxations will help lower income groups, particularly women, to access funds for small start-ups without hassle," the official stated. Examples of such ventures include setting up tailoring shops, tiffin centres, or purchasing a two-wheeler for gig economy work.
Combating Loan Sharks and Enhancing Transparency
The official further explained that while private banks often rely on CIBIL scores and collateral for auto loans, these new rules will enable people to secure smaller amounts from registered private lenders more easily. "The non-requirement of collateral will also prevent poor people from getting harassed by loan sharks," the official emphasized, underlining a key benefit of the formalization push.
The rules also include strong borrower protections. For loans where security is taken, lenders are now mandated to return the collateral within 30 days of the borrower's final repayment. Furthermore, to improve oversight and transparency, every registered moneylender must upload an annual statement for each financial year on a designated government portal by September 30.
A Step Towards Accountable Lending
Authorities believe that this mandatory digital filing will allow the government to track lending activities more effectively and reduce malpractices. All financial records must be maintained by lenders for a minimum period of eight years, ensuring a clear audit trail.
This comprehensive policy reform is poised to unlock entrepreneurial energy at the grassroots level. By removing the traditional barrier of asset-based security, the Tamil Nadu government aims to democratize access to credit, foster small business growth, and bring more vulnerable borrowers into the fold of regulated financial services.
