An insight into Mudra Loans

The Union Finance Minister of India presented a new scheme in his Budget speech of the financial year 2015-16. Its name is ‘Pradhan Mantri Mudra Yojana‘ or simply the ‘Mudra scheme’. The scheme facilitates the creation of a Mudra Bank. The Government of India handles the operations of the Mudra Bank (Micro Units Development and Refinance Agency Bank). It is a financial institution that extends Mudra Loans to small financing institutions, non-banking financial institutions, commercial banks, Regional Rural Banks, Cooperative Banks, and Micro Financing Institutions.

These institutions avail the loans at very low-interest rates from the Mudra Bank. They further provide loans to MSMEs (Micro, Small and Medium Enterprises). MSMEs are businesses that require loans to progress and develop their standing in the market.

Hence, the Government of India ensures that these enterprises can avail the necessary credit at low-interest rates. This shall, in turn, facilitate economic growth and development of the country.  The MSMEs eligible to avail the Mudra Loans are those belonging to the manufacturing, trading, services sector, and agricultural activities.

Mudra Bank is a subsidiary of the Small Industries Development Bank of India (SIDBI), which is responsible for its operations. However, it does not lend to the entrepreneurs/enterprises directly. It only lends through the medium of registered banks, NBFCs, or other financial institutions.

The Government of India has set the period of repayment of loans as 5 to 7 years.

Mudra Loans

Role of Mudra Loans

The role of Mudra Loans is to facilitate the process of income generation and employment throughout the country. Since availing the necessary credit by the MSMEs increase their businesses, it shall lead to an increase in job creation. The loans that Mudra Banks provides give the dwindling MSMEs the necessary to push to improve their performance.

With the businesses expanding, this shall, in turn, lead to the social and inclusive development of India. The Banks and financial institutions focus on lending to big business so that their collection of interest rates are high. Mudra scheme lays the focus on the micro, small, and medium business to come to the fore.

The loans that the regular bank provides require a lot of formalities and the interest rates are grossly high. Mudra Bank facilitates the extension of loans at a lower interest rate keeping in mind the needs of the beneficiaries.

The loans extended by Mudra Banks are mainly for the following purposes

  • Business loans to the vendors, shopkeepers, traders, manufacturers, and citizens in the service sector.
  • Financial loans to micro-units.
  • Loans for purchasing transport vehicles.
  • Credit to the Food products Agricultural and sector.
  • Loans for practicing activities such as that of beauty parlors, gymnasiums, tailor shops, among others.

Stages under Mudra Loans

Under the Mudra scheme, the non-corporate micro, small and medium enterprises can avail loans until the amount of 10 Lac.

The entrepreneurs/enterprises can avail the necessary loans based on the categories that their business falls into. Therefore, the amount of loans they get depends upon the business models of the beneficiary.

There are 3 such stages of credit availability, which are the following

  • Shishu
  • Kishor
  • Tarun

‘Shishu’ stage caters to those entrepreneurs/enterprises that are in the primitive stages of their business. Thus, their requirement of credit is generally less. The maximum amount the beneficiary is eligible to get under this category is INR 50,000.

‘Kishor’ stage is meant for those businesses that are already set up, but require funds for growth. It also caters to those who have a higher requirement of credit than available in the Shishu stage. Hence, the amount of loans available under this category is in the range of INR 50,000 to INR 5 Lac.

‘Tarun’ stage includes those businesses that are established, yet need credit for further expansion. Their requirement of credit is higher than available under the other categories. The maximum amount of loans available under this stage is INR 10 Lac. Therefore, the loan credit under this stage ranges from INR 5 Lac and INR 10 Lac.

The funding support from MUDRA are of four types:

  • Micro Credit Scheme (MCS) for loans up to 1 lakh finance through MFIs.
  • Refinance Scheme for Commercial Banks / Regional Rural Banks (RRBs) / Scheduled Co-operative Banks
  • Women Enterprise program
  • Securitization of the loan portfolio

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