Baby steps: The bulk of Mudra loans fall under the Shishu category of up to Rs 50,000

Analysts believe that overall, Mudra has not increased pain for banks in the micro, small and medium enterprise segment.

About 83 percent of the Mudra loans drawn by customers from banks and other financial institutions have an average ticket size of less than Rs 50,000, according to official data.

Mudra or Micro Units Development & Refinance Agency, is a channel for government credit scheme meant for entrepreneurs under which loans up to Rs 10 lakh are given. Under this, there are three categories—Shishu (loans up to Rs 50,000), Kishore (loans for Rs 50000 to Rs 5 lakh) and Tarun (Rs 5-10 lakh).

As of March 2023, banks and financial institutions had sanctioned Rs 23.2 lakh crore of loans under the Mudra scheme, out of which 40 percent or Rs 9.28 lakh crore was given under the Shishu category. That comes 83 percent of the total 40.82 crore loan accounts, according to official data shared by the Press Information Bureau.
What does these loans are used for?

This means, the vast majority of Mudra loans are used for business activities such as buying cattle, starting a vegetable shop, kirana or neighbourhood shop or flour mill, etc, according to microlenders.

"Our clients use the loan to buy cattle like buffalo, cow or goat, they make a living buy selling milk. Similarly, tailors use the loans to buy a sewing machine. Vegetable vendors and kirana store owners use it as working capital," said Sadaf Sayeed, CEO, of Muthoot Microfin Ltd.

Banks and financial institutions have sanctioned Rs 23.2 lakh crore to over 40.82 crore beneficiaries under the Mudra Yojana launched to fund the unfunded eight years ago.

The scheme

The Pradhan Mantri MUDRA Yojana (PMMY) was launched on April 8, 2015, by Prime Minister Narendra Modi to facilitate easy collateral-free microcredit of up to Rs 10 lakh to non-corporate, non-farm small and micro entrepreneurs for income-generating activities.

Alok Misra. CEO and director at Microfinance Institutions Network (MFIN) said that roughly 60-65 percent of people with Rs 50,000 generally use it to expand their existing businesses. "Only 30-35 percent of new business have been started by in the Shishu loan category," said.
Call for higher limit for small loans

Some industry experts believe that there is a need to expand the loan ticket size.

"I would suggest increasing loan size from Rs 50,000 to 2 lakh and from Rs 5 lakhs to Rs 10 lakh and from Rs 10 lakh to Rs 25 lakh since this scheme (PMMY) itself eight years old," said HP Kumar, senior executive committee member, FICCI-CMSME (a body that aims to empower MSMEs) and director, external affairs, Power2SME Pvt Ltd.

Earlier, former finance minister P. Chidambaram pointed to the figure of 83 percent loans and said, "That is, Rs 19,25,600 crore of loans have been given to borrowers at the rate of Rs 50,000 or less. It leaves me wondering, what kind of business can be done today with a loan of Rs 50,000?"

Loans under PMMY are provided by member lending institutions—banks, non-banking financial companies (NBFCs), microfinance institutions (MFIs) and other financial intermediaries.

For FY22, the total loan amount disbursed, which includes loans by public and private sector banks, NBFCs, MFIs, small finance banks, NBFC-micro institutions, regional rural banks and state cooperative banks was Rs 3.31 lakh crore.

Will Mudra loans add to the pain of banks?

Analysts believe that overall, Mudra has not increased pain for banks in the micro, small and medium enterprise (MSME) segment. "The NPA (non-performing asset) trend is a few percentage points lower than overall SME NPA. In addition, for higher-ticket Mudra loans some banks avail of the credit guarantee scheme that protect against those loans, But one also has to note that Mudra loans are relatively shorter tenor loans and hence are written off quickly," said Jindal Haria, director, financial institutions, at India Ratings and Research.
"The NPA numbers are likely to increase as more lenders scale up. This is natural since most banks will become lenient as they scale up to grow fast. But the ones who control this process without compromising on the lending framework will be benefited," said Vikas Gupta, CEO and chief investment strategist, OmniScience Capital, a wealth management company.