Pradhan Mantri Mudra Yojana

Indian Economy glossary

Also called: PMMY, Mudra loans · Topic: Rural Credit, Microfinance and Financial Inclusion · NCERT: Beyond NCERT

Meaning

Pradhan Mantri Mudra Yojana (PMMY) is a central government scheme, started in 2015, that gives collateral-free loans to small, non-corporate businesses outside crop farming. Examples are shopkeepers, tailors, repair shops, food vendors and small manufacturers. The loans come from banks, NBFCs and microfinance institutions (MFIs). The scheme matters because these tiny firms usually have no land title, salary slip or audited accounts to offer a bank. Without Mudra, many of them would borrow from moneylenders at very high rates.

Explanation

How the scheme works

  • The problem it solves
  • Banks lend against collateral (an asset, such as land or a house, that the lender can sell if the loan is not repaid) and against documents.
  • A small proprietor usually has neither, so the business is "automatically out of the credit network" (Class 11).

  • The owner then turns to informal lenders. They may charge 5% a month, which is 60% a year.

  • What Mudra does

  • It asks for no collateral, so the business plan and the borrower's record take the place of security.
  • It gives loans for working capital (money for day-to-day costs like raw material and wages) and for small equipment.

  • The motto is "funding the unfunded".

  • Who lends

  • The money reaches borrowers through Member Lending Institutions. These are commercial banks, RRBs, small finance banks, cooperative banks, NBFCs and MFIs.
  • MUDRA (Micro Units Development and Refinance Agency) is a refinance agency under SIDBI. It does not lend to borrowers directly. It refinances lenders, which means it gives them funds against the loans they have already made.

The three loan categories

  • Loans are grouped by the stage of the business:
  • Shishu ("child"): the smallest loans, for a business that is just starting.
  • Kishore ("adolescent"): middle-sized loans, for a business that is growing.

  • Tarun ("young adult"): the largest loans, for a business that is getting established.

  • The loan ceiling was ₹10 lakh when the scheme began in 2015. It has since been revised (verify current).

  • Who is covered: non-corporate, non-farm units in manufacturing, trading and services, and also activities allied to farming, such as dairy, poultry and beekeeping.
  • Who is not covered: crop loans. Those go through the Kisan Credit Card.

What keeps lending going: the guarantee

  • A credit guarantee is a promise by a government-backed fund to repay the lender if the borrower defaults.
  • Mudra loans are covered by the Credit Guarantee Fund for Micro Units (CGFMU), set up in 2015.
  • How it works:
  • The guarantee lowers the bank's risk if a borrower defaults.
  • So the bank is willing to lend without collateral.
  • So more first-time borrowers get formal credit.

Worked example: why cheap formal credit matters

  • Take a loan of ₹10,000 for 4 months (the Class 10 Sonpur case):
  • From a moneylender or trader at 3% a month: interest = ₹1,200.

  • From a bank at 8.5% a year: interest ≈ ₹283.

  • A collateral-free formal loan like a Mudra loan lets the small borrower pay the second rate instead of the first. The business keeps more of its earnings.

  • Average loan size for women: women got loans worth ₹2.22 lakh crore under PMMY in FY 2023-24, spread over 4.24 crore women. ₹2.22 lakh crore ÷ 4.24 crore ≈ ₹52,000 per woman.

In India

  • Who runs it: the Union Ministry of Finance runs the scheme. MUDRA, under SIDBI, refinances the lenders. Banks, NBFCs and MFIs give the actual loans.
  • The rules that support it:
  • Priority sector lending (PSL) means the share of their lending that the RBI requires banks to give to chosen sectors. Domestic commercial banks must lend 7.5% to micro enterprises (verify current). This pushes banks to make Mudra-type loans.

  • CGFMU (2015) guarantees Mudra and other micro loans.

  • Bringing informal firms in: the Udyam Assist Platform (January 2023) registers Informal Micro Enterprises. Once registered, their loans count under Priority Sector Lending.

  • Reach among women: 4.24 crore women got PMMY loans worth ₹2.22 lakh crore in FY 2023-24. Women own 37.6% of Udyam registrations, against an aspiration of 50%.
  • Where it sits in financial inclusion: PMJDY (2014) gave people a bank account. Mudra (2015) is the next step, giving them business credit through that account.

Don't confuse with

  • Self-Reliant India (SRI) Fund: gives MSMEs equity (money in return for a share of the firm) through a Mother Fund and Daughter Funds. Mudra gives loans. The average SRI investment is about ₹22 crore per firm. The average PMMY loan to a woman is about ₹52,000.
  • CGTMSE (2000): a guarantee scheme for micro and small enterprise loans. It does not lend. Mudra loans are guaranteed by a different fund, CGFMU (2015).
  • PMEGP: gives a subsidy on project cost, which is higher for women: 35% rural / 25% urban. A Mudra loan has no capital subsidy and must be repaid in full.
  • Kisan Credit Card: a revolving limit for crop farming. Mudra is for non-farm and farm-allied businesses.

Prelims Hooks

  • MUDRA = Micro Units Development and Refinance Agency. It works under SIDBI and refinances lenders. "MUDRA lends directly to borrowers" is FALSE.
  • The three PMMY categories, smallest to largest: Shishu → Kishore → Tarun.
  • Mudra loans are collateral-free. Their guarantee comes from CGFMU (2015), not CGTMSE (2000).
  • Lenders are banks (including RRBs and SFBs), NBFCs and MFIs. Corporate firms and crop loans are outside the scheme.
  • FY 2023-24: 4.24 crore women got PMMY loans worth ₹2.22 lakh crore.
  • The Udyam Assist Platform (January 2023) brings Informal Micro Enterprises under Priority Sector Lending.

Mains Points

  • Access vs quality of credit. Mudra brought crores of first-time, often women, borrowers into formal credit. But loans of about ₹52,000 mostly support survival-level businesses, not firms that hire workers. Small loans can also be used for consumption, the same critique NCERT makes of SHG loans. Collateral-free lending without good appraisal can lead to over-indebtedness and bad loans, as in the microfinance stress of 2024-25 (verify current).
  • The "missing middle". A woman who has outgrown a Mudra loan cannot yet take ₹22 crore of SRI equity, so no scheme fits her. Ways to build a ladder between the two:
  • CGTMSE's 85% guarantee cover for women;
  • meeting the 3% procurement target for women-owned MSEs, where actual purchases were only 1.26%;
  • using GST and UPI records to give proprietors a track record.

Credit has to come before equity.

  • Linking it to the wider policy. Mudra fits a larger chain: Jan Dhan accounts, then Udyam formalisation, then PSL and guarantees, then Mudra credit. It is a policy tool for GS-III themes such as inclusive growth, MSME finance and self-employment, and for the GS-II theme of women's empowerment.

Read more