A critical constraint to entrepreneurship in India is the availability of finance for the creation and growth of new ventures. Although there are tremendous opportunities to invest in informal and microenterprise segments, many owners face difficulties in obtaining credit from conventional banking sources due to a lack of guarantees, poor credit histories, or the absence of relevant business experience. Due to this challenge, the Government of India established the Micro Units Development and Refinance Agency Ltd. (MUDRA) in 2015 to finance micro and small businesses in need across the country. This is an endeavour that seeks to support citizens or entities that fall under the micro-enterprise category and small enterprises that require capital to expand.
What is a MUDRA Loan?
The credit reference number identifies it as a MUDRA Lit, which is one of the financial aids under the Pradhan Mantri Mudra Yojana, launched by the Government of India. This scheme aims to ensure that micro and small business enterprises in the country can access loans without collateral and at lower interest rates. The loan amount varies from ₹50,000 to ₹1,00,000, depending on the business’s requirements and growth level. MUDRA loans are categorized into three types based on the funding required by the company:
- Shishu Loan: Small business loans extending to ₹50,000 for the new business.
- Kishor Loan: A loan of ₹5,50,001 to ₹ 5,50,000 is available for a startup business that is in the growing or expansion stage.
- Tarun Loan: Business loans up to ₹10 lakhs are available for established businesses that wish to expand even further with loans between ₹5,00,001 and ₹10 lakh.
Such loans are designed to finance different business activities, such as replenishing working capital, purchasing new equipment, or extending existing production facilities.
Eligibility Criteria for MUDRA Loans
Although MUDRA loans are intended for small businesses, not everyone can apply directly for these loans. However, certain conditions must be met by applicants to access a loan through the MUDRA scheme. Let’s break down the key requirements for eligibility:
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Type of Business
The MUDRA loan facility focuses on the needs of micro and small non-farming business units. The applicant must be involved in a non-farm income-generating activity such as:
- Retail traders
- Small manufacturers
- Service providers
- Artisans
- Particular kinds of activities related to agriculture, food processing, packing, etc.
- Holders of PSV permits (owning a small number of vehicles for hire and reward)
- Companies adopting new forms of business strategies
This is a business fundraising scheme targeted at the informal sector, which faces disparities in accessing conventional funding solutions. Persons belonging to the categories mentioned above and from any business entity are eligible for MUDRA loans.
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Eligibility Based on Business Size
According to the rules of MUDRA loans, the businesses applying must fall into the micro-enterprise or small-enterprise category. According to the criteria defined by the Government of India, a micro-enterprise is one where the investment in plant and machinery is up to ₹25 lakhs, and an enterprise is small where the investment in machinery is up to ₹ five crores.
However, MUDRA loans are mainly available to microentrepreneurial units. Accordingly, the scheme will primarily target businesses with limited capital investment and those capable of expansion once they are financed.
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Age Limit
There is no age bar for MUDRA loans, but most applicants are 18 years of age or older. Because these loans are supposed to be for people who want to start or expand a business, borrowers are usually adults who wish to embark on owning or growing a business.
The applicants should also be people who wish to operate a business and have a proper strategy for its growth.
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Collateral-Free Loans
Perhaps one of the successes of MUDRA loans is that they do not require any collateral for either personal or business loans. This makes it much easier for the businessperson who may not have used many assets to approach the people who can provide funds. However, the applicant may be required to provide additional securities, such as personal guarantees and business plans, depending on the size and nature of the loan.
One of the more appealing features of the MUDRA loan scheme is that it reduces risk for lenders and provides a means for individuals without tangible collateral to access credit.
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Credit History and Documentation
However, as will be seen, creditworthiness has emerged as a key qualifying factor for the MUDRA loan scheme, even though the latter does not entail guarantee-backed security, unlike micro-credit schemes. Lending to an applicant’s business plan will focus on its viability, existing and expected earnings, and solvency.
The loan application will also require essential documentation such as:
- A valid proof of identity for appearance as the first finalist was holding an Aadhar card, voter ID, or passport.
- Utility bills, lease agreements, etc.
- Documents that have a connection to the business (registration for GST, income tax, business license, etc.)
- Any financial reports and statements of the bank that the business is using.
Compared to other types of loans, applicants may not need some of the most frequently required documentation; however, some verification necessities do exist to ensure that the applicant and their business are financially and genuinely sound.
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Business Track Record (For Larger Loans)
Where the amount borrowed falls under Kishor and Tarun, a further pathological credit check may be demanded from the borrower to prove a few years of business experience. These loans are commonly used by organizations that seek to grow or scale up their operations. Those applying for loans in these categories should have evidence of past profitability or business expansion; however, startup businesses with firm plans can also qualify.
How to Apply for a MUDRA Loan?
Getting a MUDRA loan is as easy as follows, and one can apply both online and offline. Here’s a quick overview of how to apply:
1. Choose the Type of Loan: The loan options available depend on the business’s size and needs. You can choose between Shishu, Kishor, or Tarun.
2. Visit a Bank or Financial Institution: The Financial Management for Micro and Small Enterprises is provided through the MUDRA loans by the product through collaborative support of the public and private sector banks, Microfinance institutions (MFIs) and Non-Banking Financial Companies (NBFCs) One has to go to one of the above institutions to fill the loan.
3. Complete the Application: Complete the application form and submit the identification proof or any proof of the business, and other related documents.
4. Review and Processing: They will then follow up on your application and other relevant documents you have provided. They may also undertake a field visit as part of the assessment of business information.
5. Loan Disbursal: Once the loan has been disbursed, it will be transferred to the applicant’s bank account within a few days.
Benefits of MUDRA Loans
The MUDRA loan scheme provides numerous benefits for small business owners, including:
- Collateral-free Loans: The lack of recourse to personal assets and/or guarantees reduces the risks to shareholders of high-net-worth individuals’ financials.
- Affordable Interest Rates: The usual interest rate of MUDRA loans is relatively lower than most business loans available in the market.
- Support for Growth: It can be used as working capital, to acquire machinery, or to expand a business.
- Financial Inclusion: Through MUDRA, it becomes easier to extend the monetary inclusion policy to the underbanked and unbanked populace, thus promoting entrepreneurship.
