8 years of MUDRA scheme: How helpful have been MUDRA loans?

By: Yash Gupte

The scheme has shown significant success in promoting entrepreneurship, with 68 percent of accounts under the scheme belonging to women entrepreneurs and 51 percent belonging to entrepreneurs from SC/ST and OBC categories.

The Ministry of Finance recently announced that the Pradhan Mantri MUDRA Yojana (PMMY) which was launched on April 8, 2015 has completed eight years and about Rs 23.2 lakh crore has been sanctioned in 40.82 crore loan accounts. The scheme has shown significant success in promoting entrepreneurship, with 68 percent of accounts under the scheme belonging to women entrepreneurs and 51 percent belonging to entrepreneurs from SC/ST and OBC categories. It was launched by Prime Minister Narendra Modi in 2015 with the intention of making easy collateral-free microcredit of up to Rs 10 lakh available to small and micro entrepreneurs for income generating activities. The Member Lending Institutions (MLIs), which include Banks, Non-Banking Financial Companies (NBFCs), Micro Finance Institutions (MFIs), and other financial intermediaries, provide the loans under PMMY.

Highlighting indigenous growth through MSMEs, the Finance Minister said, “The growth of MSMEs has contributed massively to the “Make in India” programme as strong domestic MSMEs lead to increased indigenous production both for domestic markets as well as for exports. The PMMY scheme has helped in the generation of large-scale employment opportunities at the grassroots level and also has proved to be a game changer while boosting the Indian economy.”

Launched with an aim to encourage small businesses and based on one of the pillars of the financial inclusion programme in the country, Banks were asked to offer three categories of collateral-free loans under the scheme: Shishu (up to Rs 50,000), Kishore (between Rs 50,000 and Rs 5 lakh), and Tarun (up to Rs 10 lakh). The MUDRA scheme is based on the pillar of ‘Funding the Unfunded,’ while the other two pillars are ‘Securing the Unsecured’ and ‘Banking the Unbanked.’

The loans under PMMY are given to cover both the term loan and working capital components of financing for income-generating activities in the manufacturing, trading, and service sectors as well as activities related to agriculture like poultry, dairy, beekeeping, etc. Lending institutions set the interest rate in accordance with RBI standards.  In the event of a working capital loan, interest is only assessed on funds that the borrower keeps overnight.

PM Narendra Modi, Finance Minister Nirmala Sitharman and Minister of State for Finance Dr. Bhagwat Karad highlighted the success of the MUDRA Yojana and lauded the scheme for enabling the youth to become successful entrepreneurs while on the other hand, Congress leader and former Finance Minister P Chidambaram in a tweet said that 83 percent of the loans given under the scheme are under Rs 50,000 which leaves him wondering what kind of business can be done today with a loan of that amount.

Source: Ministry of Finance

The highest number of loans were sanctioned in the year 2019-20. Around 6.22 crore loans were sanctioned under the scheme and amount worth Rs 3.37 lakh crore was sanctioned. The number of loans under the scheme dropped to 5.07 crore in 2020-21 due to the COVID-19 pandemic but it should be noted though the number of loans sanctioned dipped sharply in the pandemic year, the amount sanctioned under the scheme didn’t drop much and remained at pre-pandemic levels. In 2018-19, the amount sanctioned under MUDRA scheme was Rs 3.22 lakh crore and even during the pandemic year, the amount sanctioned was Rs 3.22 lakh crore. The highest amount under the scheme (Rs 4.32 lakh crore) was disbursed in 2022-23.

Talking about the category wise loans under the scheme, the Ministry mentioned that 83 percent of the loans were sanctioned under the Shishu category (up to Rs 50,000), 15 percent loans were approved under the Kishore category (Rs 50,000 to Rs 5,00,000) and only 2 percent loans were sanctioned under the Tarun category (Rs 5,00,000 to Rs 10,00,000).

Source: Ministry of Finance

The chart shows that all the targets set by the government under the MUDRA scheme were achieved except for the year 2020-21. Data show that the overall effectiveness of the programme implemented by all lending institutions decreased by 5 percent over the previous year. This is primarily because NBFCs and SFBs made relatively few disbursements during FY 2020–2021. Apart from the achievements of targets, there was a decrease in the number of accounts in 2020-21 as compared to 2019-20.

Among the Public Sector Banks, State Bank of India (SBI), with sanction of Rs 28,511.62 crore to 9.86 lakh loan accounts topped the table. The Private Sector Banks recorded improvement in performance with a sanction of Rs 1,17,679.31 crore during the year, registering 26 percent growth over the previous year. The major contributors in the private sector banks category were IndusInd Bank and Bandhan Bank with Rs 41,944.51 crore and Rs 41,338.61 crore of sanctions respectively.

Source: www.mudra.org.in

Among the three categories of the MUDRA scheme, most of the loans were sanctioned under the Shishu category with a share of 77.60 percent. Out of the total sanctioned amount, 36.79 percent was disbursed under the Shishu category while 40.59 percent was disbursed under the Kishore category. Out of the total, 56.6 percent of the accounts in Shishu category belonged to women who were sanctioned 26.4 percent of the amount in the Shishu category. The reason for high share of women in Shishu category is lending of micro-loans by the MFIs primarily to women. The share of the weaker section (SC/ ST/OBCs) borrowers of the society in the PMMY programme for FY 2021-22 was 51.9 percent in terms of loan accounts, and 37.1 percent in terms of loan amount sanctioned. The shares of SC, ST and OBC category borrowers were 17.5 percent, 6.6 percent and 27.8 percent, respectively, in terms of the number of loans sanctioned for FY 2021-22.

Though the MUDRA scheme has helped a number of people in expanding their businesses, experts like former RBI Governor Raghuram Rajan and chiefs of the PSU banks like SBI and PNB had told that the parliamentary standing committee on finance that the collateral free MUDRA loans are prone to turning into Non-Performing Assets (NPA) and can be the possible source of the next banking crisis. In January 2019, RBI had cautioned the government over NPA spike in Mudra loans, pointing out that it had risen to Rs 11,000 crore.