Mudra Loans – Prime Minister Mudra Yojana Explained

Dec 29, 2020

India’s Micro, Small and Medium Enterprises or MSMEs have often been identified as the backbone of the country’s economy in the past few years. It is primarily due to the sector’s sizeable contribution to the GDP. To further propagate the growth of this sector, the Government of India has introduced various initiatives over the years.

The Pradhan Mantri Mudra Yojana (PMMY full form) introduced in 2015 has been one of the most crucial government-backed initiatives that have proffered MSMEs with funding to realise various business-related goals. As per the official website for Mudra, in the FY2019-20, a total of 622,37,981 PMMY loans were sanctioned to promote the growth of the sector.

Thus, for individuals looking to set up their own businesses, or expanding existing ones, these advances offered against nominal Mudra loan interest rates can be a viable option to avail funding. Here’s a detailed look at the scheme for a better understanding.

What is MUDRA?

In the year 2013, the NSSO survey had concluded that there were about 5.77 crore micro and small business units in India which were mostly either own account enterprises or individual proprietorships. However, most of such units did not have access to the formal banking system, thus leading them to resort to informal borrowing to avail financing for operations.

To bridge this gap between such units and provide a viable source of financing, the government formed the Micro Units Development & Refinance Agency Ltd. (Mudra) under the aegis of PMMY. MUDRA is responsible for the development and refinancing of the country’s micro-business sector by lending support to various financial institutions that offer loans to small and micro businesses engaged in trade, service and manufacturing sector.

The Mudra loan interest rates offered against these funding options are nominal to help business owners avail and repay them easily.

Products Offered under Mudra Loan –

Mudra loans are offered by various financial institutions across India, including MFIs, banks, NBFCs, and such other intermediaries as notified under MUDRA. These institutions offer three specific categories of Mudra loans, as envisaged under PMMY.

These categories are –

  • Sishu

Individuals looking to set up their own businesses can avail loans under this category, which are offered up to an amount of Rs.50,000. One of the most popular avenues to channel the loan availed under this category is to purchase machinery for business.

  • Kishor

This category of Mudra loan is mostly availed by individuals seeking financial assistance to expand the scope of their existing businesses. The loans sanctioned under the Kishor category range between the quantum of Rs.50,000 and Rs.5 lakh.

  • Tarun

Loans under the Tarun category cater to the needs of those business persons who have already established their ventures and are looking for capital for further expansion. Under this category of loans, individuals can avail amounts ranging between Rs.5 lakh and Rs.10 lakh.

The Mudra loan interest rates charged against each of these categories depend on the MCLR rate as set by India’s apex bank – RBI.

What are the Eligibility Criteria to Avail Mudra Loans?

To avail of the above-mentioned Mudra loans, business-persons must fulfil a few requisite eligibility criteria. These are as follows –

  • They must belong to the age bracket of 18 years and 65 years.
  • They should be –
  • An individual
  • An MSME
  • A trader
  • A manufacturer
  • A business owner
  • A small industrialist
  • A shopkeeper
  • Own a start-up
  • Someone who is engaged in agriculture-allied activities since April 1st 2016.

Apart from fulfilling these eligibility criteria, individuals will also need to submit a list of documents to avail these loans, without which they cannot be deemed qualified for them.

In this regard, it is worth mentioning that sometimes the eligibility and documentation requirements for these loans can reduce the scope of a few individuals to avail them. Under such circumstances, one can look into alternative funding options like gold loans that do not come with such stringent requirements.

What is the Nature of Assistance Offered through Mudra Loans?

Under the different product categories of Mudra loans, applicants can avail need-based overdraft limits, term loans and composite loans to acquire working capital, capital assets and other marketing-related requirements.

The loan amount to be disbursed, available up to a maximum limit of Rs.10 lakh, is determined based on the business plan and investment requirements proposed by eligible applicants. Furthermore, to help businesses meet their working capital requirements, Mudra has launched the “Mudra Card”, which is a debit card that allows users to withdraw credits flexibly as per their requirements.

Apart from the Mudra card, PMMY also includes a bunch of other offerings like the Micro Credit Scheme, Credit Guarantee Fund, Bank refinancing scheme, Equipment Finance scheme, credit to micro-enterprises, etc.

What are the Sectors Covered under Mudra?

While these advances, available against nominal Mudra loan interest rates, can effectively help small business owners meet their funding requirements, they only cater to specific sectors. These include –

  • Community, personal and social service activities – These include small businesses like beauty parlours, salons, boutiques, dry cleaning services, medicine shops, tailoring shops, and such.
  • Transport sector and activities – These loans can be utilised to support various units for the purchase of transport vehicles like passenger cars, taxis, e-rickshaws, small goods transportation vehicles, three-wheelers, etc.
  • Textile sector- Mudra loans cater to the requirements of the textile sector by offering monetary support to undertake activities pertaining to various types of embroidery work, stitching, regional handiwork, etc.
  • Food production sector – Activities from this sector like achaar making, papad making, preservation of agricultural produce, etc. can be supported through these loans.

Since the usage of Mudra loans is limited to these sectors only, individuals looking to set-up other businesses can opt for other forms of financial aid. In this regard, gold loans offered by lenders like Rupeek Fintech Pvt. Ltd. can be extremely helpful since they do not impose end-use restrictions on borrowers.

How to Apply for a Mudra loan?

Those looking to avail financial assistance under PMMY at nominal Mudra loan interest rates can easily apply for the same at the nearest branch of any financial institution like – Public Sector Banks, Private Sector Banks, Regional Rural Banks, Non-Banking Financial Companies, Micro Finance Institutions, etc.

The loans will be sanctioned upon meeting the eligibility norms and documentation requirements put forth by these lenders.

While the application process for Mudra loans is quite simple, prospective borrowers can also look into gold loans as viable funding options, owing to facilities like instant approval and disbursal of the loan amount. Furthermore, since the loan amount is sanctioned against the value of gold pledged, individuals can avail as much as they require, without any ceiling.

Thus, while Mudra loans have certainly made affordable financing more accessible to budding entrepreneurs, the scope of their utility remains limited. Individuals can, thus, easily turn to other more convenient options like gold loans if the need arises.

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