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 because of no guarantee, no credit histories or the absence of relevant business experience. Due to this challenge, the government of India established Micro Units Development and Refinance Agency Ltd. (MUDRA) in 2015 to finance the micro and small businesses in need across the country. This is an endeavour that seeks to support citizens or entities that come under the micro end of the fence and small enterprises which require capital to expand.
What is a MUDRA Loan?
The credit reference number for it identifies as a MUDRA Loan, and it’s one of the financial aids under Pradhan Mantri Mudra Yojana that was launched by the Government of India. This scheme is meant to ensure that micro and small business enterprises in the country access loans without collateral and at cheaper interest rates. Loan amount varies anywhere from ₹50000 to ₹1,00,000 lac depending on the requirements and growth level of the business. MUDRA loans are categorized into three types based on the funding required by the business:
- Shishu Loan: Small business loans extending to ₹50,000 for the new business.
- Kishor Loan: A loan of ₹50001 to ₹500000 is available for a start-up 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
Though MUDRA loans are meant for small businesses, not everyone can directly apply for these loans. However, some conditions must be met by the applicants in order 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 loan facility of MUDRA is focused on the needy and potential MICRO & 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 that has some disparities in obtaining 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 Rupees twenty-five lakhs, and an enterprise is small where the investment in machinery is up to Rupees five crores.
However, MUDRA loans are mainly available to microentrepreneurial units. Accordingly, the scheme will mainly target businesses with little capital investment and those capable of expansion once 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 want to embark on owning or expanding 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 it does not require any collateral for the loans – personal or business. This makes it much easier for the businessperson who may not have used many assets to approach the people who can provide funds. However, other additional securities that the applicant may be required to provide are different forms of security, including personal guarantees and business plans, depending on the size of the loan and its nature.
One of the more appealing features of the MUDRA loan scheme is that it reduces risk for lenders and offers a way for people without tangible security to access credit.
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Credit History and Documentation
However, as shall be seen, creditworthiness has emerged as a key qualifying factor of the MUDRA loan scheme, even if the latter does not entail guarantee-backed security as it does with micro-credit schemes. Lenders analyzing the 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 often required documentation; however, some verification necessities do exist to ascertain that the applicant and his business are financially sound and genuine.
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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 for organizations that seek to grow or upscale their operations. Those applying for loans in these categories should have evidence of past profitability or business expansion, though startup businesses with good 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 option available depends on your 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: He/she 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 discredited, 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 lessens 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 financial inclusion policy to the underbanked and unbanked populace, thus promoting entrepreneurship.
