Mudra Loans and Start-ups; The Journey so far

New Delhi | Updated: August 31, 2016 7:04:37 PM

So what is Pradhan Mantri MUDRA Yojana (PMMY) scheme?

Indian rupee vs US dollarThe MUDRA Scheme does not provide any interest subsidy or waiver, but still it is not expensive.(Reuters Photo)

So what is Pradhan Mantri MUDRA Yojana (PMMY) scheme? The key objective behind the scheme is to refinance loans without collaterals of upto 10 lacs that are provided by lending institutions to non-corporate small borrowers, for income-generating activities in the non-agricultural segment such as manufacturing and servicing.

The overriding idea backing the scheme is two-pronged. Firstly, ‘fund the unfunded’ at reasonable rates so as to facilitate financial inclusivity. Secondly, it is to protect small business borrowers from the high interest charging money-lenders. While the Jan Dhan Yojana was targeted towards increasing banking penetration and financial inclusion, this scheme provided the ability to use credit capital to help startup businesses grow. It is important because contrary to popular belief only 1 crore 25 lakh people get employed by large enterprises, whereas SMBs employ 12 crore people in the country.

The scheme has a total corpus of Rs 20,000 crore which can lend between Rs 50,000 and Rs 10 lakh to small entrepreneurs and banks and Mico-finance institutions can draw refinance under the MUDRA Scheme after becoming member-lending institutions of MUDRA. The far reaching effect of the scheme can be seen in how it increases the confidence of educated and skilled individuals who will now get the chance of becoming first generation entrepreneurs and existing startups will also be able to expand their business through this capital.

Uptill now, most of the SMEs existing out there used to face credit crunch issues as non-profit micro financing institutes often failed to provide capital to small businesses and commercial banks abstained from investing in them as they lacked performance history and legacy, owing to their newness.

There are three types of loans under the MUDRA scheme: Shishu loans up to Rs 50,000; Kishor loans between Rs 50,001 and Rs 5 lakh; and Tarun loans of Rs 5-10 lakh. Shishu accounts for the majority (40 per cent) of the loans disbursed. Kishor and Tarun account for 37 per cent and 23 per cent of the total disbursed amount, respectively. The Shishu loans patronizes micro businesses like a vegetable vendor, a hair salon, or a rickshaw puller while a Kishor and Tarun loan support comparatively bigger businesses such as soap manufacturing unit, sugarcane juice extraction unit, production of paper dishes or paper napkins, dairy products, pickle units and so on. Banks provide a composite loan for both working capital and term loan requirement under the MUDRA Scheme.

As on January 1st, MUDRA or Micro Units Development Refinance Agency loans of Rs 71,312 crore has already been disbursed among 1.73 crore borrowers. Within this the government refinanced loans amounted to Rs 2,000 crore and the residual Rs 69,312 crore are loans disbursed by MFIs and banks. The government has so far refinanced loans mainly of micro finance institutions. The loan can be taken from public sector and private commercial banks, regional rural banks and cooperative banks. Any entrepreneur can approach the banks with an idea and he will get loans.

The MUDRA Scheme does not provide any interest subsidy or waiver, but still it is not expensive. Any borrower can withdraw money whenever needed through their RuPay debit cards however, the rate of interest is much lower if compared to loans taken from traditional money-lenders as the interest is charged on reducing balance basis.

As a part of the MUDRA scheme a Rs 3000-crore Credit Guarantee Fund was also set up to provide insurance against default on MUDRA loans to the maximum extent of 50%.

The initial signs since the scheme was launched have been quite promising and its impact on ground can also be seen, however its success can only be gauged once the Union Budget for 2017-18 is presented in parliament.

Banks had already approved lending of Rs 72,000 crore till mid-January and while it is still short of this year’s target, the approval numbers will finish close to the target by the end of this financial year. The banks which have availed of the refinance to the maximum extent are Bank of Maharashtra, Indian Overseas Bank, and State Bank of Travancore. Of the approved Rs 5,000 crore refinance in the first year, the participating institutions have drawn around Rs 2,000 crore so far.

As per credible records, till date, the scheme has been availed for by around 1.7 crore borrowers with an average household size of 4.8 individuals. As such the scheme reached out to approximately 6.5 percent of the India’s population. Small ticket loans have always been provided by banks, at least in theory. However, because of MUDRA, certain things changed.

Applying for loans is an arduous procedure in India as banks demand a numbing number of documents. Without multiple types of KYC documents, it is difficult to open a simple bank account, leave alone getting loans. This changed with MUDRA.

Similarly, with the Modi Government’s Jan Dhan Yojana in action and the increasing penetration of Aadhar cards, with the mandatory rider of linking Aadhar, it is much easier now to approach a bank and initiate transaction.

Thirumal Raj

CEO and Founder of STC SKILLS for your kind Perusa

Do you know What is Repo Linked Lending Rate (RLLR), Wholesale Price Index (WPI), Public Debt, Finance Commission Grants & Other Transfers, Economic Survey? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.