All About Mudra Loans: The Lifesaver & Helping Hand For MSMEs In India

It has been rightly said that MSMEs (Micro, Small and Medium Enterprises) are the backbone of the Indian economy. Can you believe that MSMEs and not large corporations and industries are the biggest employers in India? MSMEs are spread across rural and urban regions, and provide employment to over 117 million individuals, mostly from unskilled and uneducated labour forces.

According to data by the Ministry of MSME, over 51 million MSMEs are spread across the nation. MSMEs contribute 7% of the nation’s GDP. MSMEs account for 40% of exports and 45% of the total manufacturing output.

Despite their significant contribution to the nation’s socio-economic development, MSMEs in India have a hard time finding the right capital to establish and grow their business. Small and medium scale entrepreneurs and businesses find it challenging to survive in the competitive business market.

One of the enormous obstacles facing MSMEs’ growth and development is not lack of will power or dedication but lack of the right capital. To address this issue, the central government has come up with various schemes over the decades.

One noteworthy scheme introduced by the current Union Government is the PMMY (Pradhan Mantri MUDRA Yojana). The project was introduced by the Honourable Prime Minister Narendra Modi in 2015.

What is the MUDRA loan scheme?

Under the MUDRA loan scheme, micro, small and medium scale businesses can avail of loans ranging from Rs. 50,000 to a maximum of Rs. 10 lakhs, as per their business needs. MUDRA (Micro-Units Development and Refinance Agency) is a wholly-owned subsidiary of SIDBI. Under this scheme, both public and private sector banks, NBFCs, rural banks, co-operative banks, and scheduled banks are offered to eligible businesses.

The MUDRA loan scheme’s primary objective is to provide a lending hand to MSME units across the country. It aims to free small businesses and aspiring entrepreneurs from the clutches of informal money lenders. The salient highlight of MUDRA loans is that when compared to traditional business loans, they are easy to avail of and have simple eligibility criteria.

Under MUDRA loans, borrowers do not have to pledge any collateral to avail of credit. Additionally, the interest rates are not fixed for these loans. They are decided on a case-by-case basis after analysing the borrower’s credit profile, the risk involved, and the loan amount. Generally, MUDRA loans’ interest rate ranges from 1% to 7% on top of the base rate.

MUDRA loans are categorised into three schemes:

Loan Category Amount of Loan
Shishu Loans Up to Rs. 50,000
Kishor Loans From Rs. 50,001 to Rs. 5,00,000
Tarun Loans From Rs. 5,00,001 to Rs. 10,00,000

 

Why are MUDRA loans considered a lifesaver for small businesses in India?

  • It’s an Unsecured Loan

MUDRA loans are unsecured – meaning borrowers do not have to provide any collateral/asset. This is a huge benefit for small businesses that do not own property to pledge against a loan. Most startups and small business units are run on rented properties, especially in their initial phase. As a result, they find it challenging to avail secured business loans. Since MUDRA loans are unsecured, it eliminates the need to provide collateral, thereby offering immense relief to small business owners who do not own property.

  • No Credit Score Threshold

MUDRA loans are backed by the government of India. This means, if the borrower fails to repay the loan due to unforeseen circumstances, the government takes responsibility for the loan. This reduces the risk borne by the lender significantly. Hence, lenders do not check the credit score of the applicant before sanctioning the loan.

It’s a huge benefit for first-time entrepreneurs and businesses starting out with low/no credit scores.

  • Low-Interest Rates and Zero Processing Charges

Another huge draw of MUDRA loans is that they offer a competitive interest rate compared to regular business loans. The loan rate is dependent on the base rate charged by the lender and doesn’t go over 1% to 7% of the base rate. Furthermore, loans applied under the MUDRA scheme are free from loan application charges and other processing fees.

  • No Restriction on the Loan Amount Usage

The loan amount borrowed under the MUDRA scheme can be used in any way – for business expansion, investing in inventory or new equipment, boosting cash flow, hiring and training staff, upgrading infrastructure/office space, etc. Thus, borrowers can utilise the amount in any way they consider the best for their business.

  • Flexible Repayment Tenure

MUDRA loans come with a flexible repayment tenure ranging from three to seven years. Borrowers can decide on their preferred repayment term based on their cash flow and monthly business budget. The loan amount is repaid in the form of EMIs over the tenure of the loan.

Who can apply for a MUDRA loan?

Entrepreneurs and business owners under the following sectors, occupations, and industries can apply for a MUDRA loan:

  • Shop owners and traders in textiles, chemicals, agricultural products, other non-farm income-generating activities, etc.
  • Community service providers, including Xerox shops, general stores, courier service shops, beauty parlours, clothes, accessories shop, bike, car repair shops, etc.
  • Non-corporate small businesses – sole proprietorship and partnership firms come under this category.
  • Transport services provide this includes rickshaws, taxis, passenger cars, mini-vans, autos, etc.
  • Textile workers and artisans include craftsmen engaged in handloom, fashion designing, embroidery, dyeing, pottery, etc.
  • The food services sector – this includes small units engaged in food processing, bee-keeping, fisheries, pisciculture, poultry, etc.
  • Machine operators, including individuals involved in operating machines for sectors like construction, mining, and manufacturing.

Eligibility Criteria for MUDRA Loans

The eligibility criteria for MUDRA loans are simple, making it easy for small business owners and first-time entrepreneurs to qualify for the loan.

  • All individuals engaged in the activities mentioned in the previous paragraph can apply for a MUDRA loan under the PMMY scheme.
  • The individual must not have defaulted on any loan previously.
  • The individual must be aged between 18 and 65 years.

How to apply for MUDRA loans?

To apply for a MUDRA loan, you have to follow the steps given below:

  • The first step is to visit the website of the bank/NBFC with which you wish to avail the loan. Most banks provide an online application form for MUDRA loans. If the application form is not available online, you can visit the nearest branch of the bank to complete the loan application process.
  • Fill in the application form by providing your personal and business details. It pays to have a detailed business plan in hand before you apply for the loan. A detailed business plan works in your favour, improving your chances of loan sanction.
  • Upload all the required documents. Generally, you have to provide id proof, address proof, and proof of business.
  • Enter the loan amount and your preferred tenure.
  • Once you submit all the required information and submit the application form, the lender will review your application and sanction the loan.

Once the loan is approved, you will be provided with a pre-loaded MUDRA card. This card is loaded with the sanctioned loan amount. It’s a RuPay debit card, and you can withdraw the required loan amount as and when needed from any ATM.

Bottom Line

The MSME sector has been unable to realise its full potential due to a lack of the necessary funds. As a result, the growth and expansion of small businesses in India have been limited. The MUDRA loan scheme is an incredible opportunity for small businesses and entrepreneurs to expand their business and achieve their entrepreneurial dreams. It helps to uplift the sections of the society that have been mainly ignored – women entrepreneurs, business owners from scheduled castes/tribes, and backward classes.

Understand the features and benefits of MUDRA loans and make your business dreams come true with access to required capital.

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