The Pradhan Mantri Mudra Yojana (PMMY) aims to encourage India’s micro enterprise development by offering credit to the previously unfunded and underfunded sector. Launched in 2015 and overseen by the Micro Units Development & Refinance Agency (MUDRA), it offers collateral-free financing to micro entrepreneurs, so they can start their own businesses.
The government hoped that this initiative not only gave India’s majority population the credit needed to set up micro units, but also boosted employment and livelihoods across the board. Read on to learn more about the Mudra loan scheme and its impact so far.
About the Mudra Loan Scheme and its Perks
Mudra loans are offered by banks, micro finance institutions (MFIs) and non-banking financial institutions (NBFCs) to:
- Proprietary companies
- Partnership firms and other legal entities
Using the available financing, these entities can start or grow their business in trading, service sectors, manufacturing and other activities related to agriculture. The Mudra loan scheme is divided into 3 categories:
- Shishu: Loans up to ₹50,000
- Kishor: Loans from ₹50,000 and up to ₹5 Lakhs
- Tarun: Loans above ₹5 Lakhs and up to ₹10 Lakhs
Interested micro entrepreneurs can apply for Mudra loan from any of the authorised lenders and get credit for up to 36 months at attractive and nominal interest rates, choosing to avail of term loans, overdrafts, working capital or composite loans for the purchase of capital assets.
The interest rate offered via the Mudra loan scheme is based on the lending institution, but will be pegged as per the advice and direction of MUDRA to ensure it is affordable. In addition, lenders offer the loans without any collateral up to ₹10 Lakhs and most lenders waive off processing charges for Shishu loans.
To further boost the availability of Mudra loans, lenders can get refinancing for the loans they offer to eligible borrowers through MUDRA. In addition, lenders offer Mudra loans to women entrepreneurs at reduced interest rates by around 25bps to encourage them to avail of its benefits.
The structure of the Mudra loan scheme is meant to uplift and ‘fund the unfunded’ with a special emphasis on women entrepreneurs, those from the SC/ST/OBC categories and minorities.
Mudra Loan Scheme Performance and Impact
This year marks the eighth anniversary of the Pradhan Mantri Mudra Yojana and the data from government sources suggests that the scheme has been instrumental in encouraging entrepreneurship in India.
It has strived to reach aspiring entrepreneurs from credit-starved districts who did not have access to formal credit and persevered to offer low-cost credit in a more seamless manner. This has helped the scheme contribute to the Centre’s larger aim of nation-building.
In fact, Finance Minister Nirmala Sitharaman also said that PMMY has been successful in not only boosting per capita income, but also made way for innovation. She further revealed that since its inception, the Mudra loan scheme has enabled micro entrepreneurs to get approximately ₹23.2 lakh crore as of March 2023 via 40.82 crore loan accounts.
In addition, the FM attributed the growth of MSMEs via this scheme to also increase participation in the government’s Make In India programme. Moreover, she categorically stated that the Mudra loan scheme has played a big part in creating employment on a large scale at the grass roots and has significantly enhanced the economy of India.
While the number of loans disbursed through PMMY has increased YoY, the COVID-19 pandemic did witness a two-year decrease in activity. This gap was bridged from March 2022 onwards, when data showed an increase in the number of applicants taking Mudra loans to fund small enterprises.
However, experts have raised doubts about the figures related to the loan portfolio reported by the RBI and other government sources. This is because the lenders who offer Mudra loans also offer similar loans to similar categories of applicants in the normal course of credit activities. Thus the split between non-PMMY loans and PMMY loans is not revealed by the data and is the cause of contention.
Moreover, micro credit financing schemes have underperformed in India in the past as small business owners are often unable to meet the eligibility requirements of formal lending institutions nor able to complete the application and paperwork processes. In this scenario, these borrowers have had to rely on informal lenders. It is thus not clear if PMMY has actually been able to bridge this gap without getting reconciled information.
That being said, data does reveal that women and underserved social groups did get access to otherwise unavailable credit facilities due to the Mudra loan scheme. While more than 70% of Shishu loans were sanctioned to women applicants in 2021-22, only 9% of Tarun loans were disbursed to female borrowers during the same time period. Data also showed that applicants from scheduled castes and tribes accounted for around 25% of loans under Shishu but just 4% under Tarun.
The pattern was found to be the same for applicants from the OBC category who formed 28% of the total under Shishu and 10% under Tarun.
However, the government is working towards creating more awareness amongst these sections of society to encourage a higher participation in this micro-credit scheme. In fact, the Mudra loan scheme was found to improve employment among women, as per a study called ‘Female Entrepreneurship, Employability And Empowerment: Impact Of The Mudra Loan Scheme’.
It considered over 400 women from West Bengal’s tribal regions and found that access to financing gave women belonging to tribal areas a way to leave behind their previous occupation of agricultural labour and gain stable self-employment. This has also led to a marked increase in their financial literacy and empowered women from the lens of economic, social, political and psychological markers.
Shishu loans with financing under ₹50,000 were the highest segment of loans offered under the scheme, amounting to 83% of the total. Vegetable vendors, kirana store owners, cattle herders and milk sellers as well as tailors used these loans to buy inventory, cattle, machinery and equipment.
While a lot more needs to be achieved to inspire youth, women, minorities and people from all walks of life to improve their livelihoods while gaining self-sufficiency through entrepreneurship, the Mudra loan scheme certainly played a large role in boosting such activities. The easy-to-meet eligibility criteria of these loans also makes it easier for micro entrepreneurs to apply for Mudra loans, increasing its accessibility.