Pradhan Mantri Mudra Yojana: Funding the unfunded
Pradhan Mantri Mudra Yojana (PMMY) is a flagship scheme of Government of India to enable a small enterprise come into the formal financial system and get affordable credit to run his/ her business.
- Who? Any Indian Citizen who has a business plan for a non-farm sector income generating activity
- Credit need? Less than Rs 10 lakh
- Possible Creditors? Banks, MFI, or NBFC
Types of Loans provided
Under the aegis of Pradhan Mantri MUDRA Yojana, MUDRA has already created the following products / schemes.
- Shishu : covering loans upto 50,000/-
- Kishor : covering loans above 50,000/- and upto 5 lakh
- Tarun : covering loans above 5 lakh and upto 10 lakh
Note that there is no subsidy for the loan given under PMMY. However, if the loan proposal is linked some Government scheme, wherein the Government is providing capital subsidy, it will be eligible under PMMY also.
What is MUDRA Bank and what is its role in the MUDRA Yojna?
- MUDRA Bank = Micro Units Development and Refinance Agency Bank
- The Rs 20,000 crore MUDRA Bank aims to provide refinancing to small and medium enterprises, particularly those from SC & ST
- The idea is to refinance micro-finance institutions through Pradhan Mantri Mudra Yojana
- This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME
Are there any concerns regarding the structure or establishment of MUDRA bank?
- The bank will be financially challenged since inception, if it is funded through non-budgetary support
- The funds for the bank would be sourced from shortfall in the achievements of the priority sector lending (PSL) targets
- Currently, the shortfall in the PSL targets of the domestic scheduled commercial banks are deposited in Rural Infrastructure Development Fund (RIDF) and for foreign banks in Small Enterprises Development Fund
- The fact of the matter is that banks have been surpassing the targets in all years, since 2002, except for the last three years
- The shortfall lies only in agricultural loans, but it would be unfair to divert the target for agriculture from RIDF to micro units
What are some of the positive points which go in favour of such a scheme?
- Informal sector accounts for 90% of our non-agricultural workforce, 50% of the GDP & 40% of the non-farm GDP
- Analysts point that the Indian GDP can be raised by almost 15% if the informal sector data is incorporated in the GDP series
- The MUDRA bank aims to boost loans and cut borrowing costs for the cash-starved domestic small businesses
But has a direct intervention from government (to facilitate loans) worked in past?
What are some of the prominent concerns in this area?
- There is always a case for direct government intervention to solve any one of our many chronic problems, to justify the need for MUDRA bank
- The govt. is trying to ensure equity through determined government action that previously drove the govt. to nationalise banks and bring priority sector lending
- However, such ‘directed credit’ has not worked successfully in the past
- The govt. control over banks had led to large-scale corruption and repeated recapitalisation through taxpayers’ money
- MUDRA bank has been over-burdened with many conflicting objectives and too-many roles, viz. a lender, consultant, regulator, think tank and an agent of social change