Mudra Loan for Small Businesses

Mudra MUDRA stands for Micro Units Development and Refinance Agency Ltd. MUDRA was setup by the Union Government in FY2016 to provide funding to non-corporate, non-farm small business enterprises and entrepreneurs. The biggest problem that small businesses and entrepreneurs face is that of funding. It is a known fact that banks and financial institutions are not very keen to lend to small/micro business. Well, banks have their reasons too. Such businessmen are unable to provide sufficient collateral (security) and this becomes a roadblock. MUDRA (or the Mudra loan scheme) seeks to remove this hurdle by providing collateral-free loans to small business and budding entrepreneurs. And the range of business activities for which you can borrow under Mudra loan scheme is seemingly endless. You can get term loans or working capital loans (Cash credit and Overdraft) under Mudra loan scheme. Let’s find out more about the Mudra loan scheme.

What Are the Different Types of Loans under Mudra Scheme?

There are three types of loan products under Mudra Scheme.

Shishu Category: Loans up to Rs 50,000. Meant for those who are starting out.
Kishore Category: Loans from Rs 50,000 to Rs 5 lacs. Meant for those who have started the business but have not yet established their business.
Tarun Category: Loans from Rs 5 lacs to Rs 10 lacs. Meant for those who want to expand their already established businesses.

As you can see, the maximum loan amount under the Mudra scheme is Rs 10 lacs.

Who Can Apply for Mudra Loan?

The only requirement is to be a citizen of India. And yes, you can take a loan to set up a business or augment/enhance your existing business. And you shouldn’t be a defaulter with any of the banks. You can’t take Mudra loan for personal purposes such as purchasing a car or for higher education. However, if you are purchasing a car for taxi, auto rickshaw or a truck, you can apply for a Mudra loan. The loan purpose has to be business and income generation. You are eligible for Mudra loan if you indulge in manufacturing, processing, trading and services. If you go through the list of eligible activities on Mudra website, almost everything (that is legal) under the sun is covered. Mudra loans can be extended for:

Business loan for Vendors, Traders, Shopkeepers and service providers
Working Capital Loans through Mudra card (discussed later in this article)
Equipment Finance for micro units
Transport Vehicle Loans (auto-rickshaws, 3 wheelers, e-rickshaw, passenger cars, taxis etc.)
Community, Social & Personal Service Activities (Saloons, beauty parlours, gymnasium, boutiques, tailoring shops, dry cleaning, cycle and motorcycle repair shop, DTP and Photocopying Facilities, Medicine Shops, Courier Agents etc.)
Food Products Sector (Activities such as papad making, achaar making, jam / jelly making, agricultural produce preservation at rural level, sweet shops, small service food stalls and day to day catering / canteen services, cold chain vehicles, cold storages, ice making units, ice cream making units, biscuit, bread and bun making etc.)
Textile Products Sector / Activity (Handloom, powerloom, khadi activity, chikan work, zari and zardozi work, traditional embroidery and hand work, traditional dyeing and printing, apparel design, knitting, cotton ginning, computerized embroidery, stitching and other textile non garment products such as bags, vehicle accessories, furnishing accessories etc.)
Activities allied to agriculture (Pisciculture, bee keeping, poultry, livestock, rearing, grading, sorting, aggregation agro industries, diary, fishery, agriclinics and agribusiness centres, food & agro-processing etc. excluding crop loans, land improvement such as canal, irrigation and wells and services supporting these activities)

Please understand this is merely an illustrative list (and by no means exhaustive) provided on Mudra website to show the breadth of activities that are covered under Mudra loan scheme. Additionally, individuals, sole proprietorships, partnerships, trusts, private limited company and public company or any other legal structure can borrow under Mudra loan scheme.

How to Apply for Mudra Loan?

You don’t have to go to MUDRA or Mudra Bank. In fact, as on date, there is no such thing as Mudra Bank. MUDRA does not give loans to any individuals. It deals with financial institutions. You have to go to your neighbourhood bank to apply for a loan under Mudra Scheme. All major banks, NBFCS and MFI provide loan under the scheme. You can see the complete list of participating financial institutions on MUDRA website.

You can download application forms from here. You can collect forms from respective banks and financial institutions too. Shishu loans have 1-page form and a shorter document list. Kishore and Tarun loans have a common 3-page form and expectedly a longer requirement list. Do note you are not guaranteed a loan under Mudra Scheme. The bank retains its discretion in lending to you. It is just that, since the Government is promoting entrepreneurship through this scheme, it may be easier to get a loan under Mudra scheme. You can apply for Mudra loan online too (discussed later in the article).

What Documents Are Needed for Mudra Loan?

Well, the list is provided in the forms itself. Shishu loans have a much shorter document list. Applications for Kishore and Tarun have to be supported by extensive documentations. Copying the list from the requirements for Kishore and Tarun loans:

Proof of identity – Self certified copy of Voter’s ID card / Driving License / PAN Card / Aadhar Card/Passport
Proof of Residence – Recent telephone bill, electricity bill, property tax receipt (not older than 2 months), Voter’s ID card, Aadhar Card & Passport of Proprietor/Partners/Directors
Proof of SC/ST/OBC/Minority
Proof of Identity/Address of the Business Enterprise – Copies of relevant licenses/registration certificates/other documents pertaining to the ownership, identity and address of business unit
Applicant should not be a defaulter in any Bank/Financial institution
Statement of accounts (for the last six months), from the existing banker, if any
Last two years balance sheets of the units along with income tax/sales tax return etc. (Applicable for all cases from Rs 2 Lacs and above)
Projected balance sheets for one year in case of working capital limits and for the period of the loan in case of term loan (Applicable for all cases from Rs 2 Lacs and above)
Sales achieved during the current financial year up to the date of submission of application
Project report (for the proposed project) containing details of technical & economic viability
Memorandum and articles of association of the company/Partnership Deed of Partners etc.
In absence of third party guarantee, Asset & Liability statement from the borrower including Directors & Partners may be sought to know the net-worth
Photos (two copies) of Proprietor / Partners / Directors

The bank can also ask for additional documents, if needed. Such an exhaustive list is likely to send shivers down anyone’s spine. However, it is possible that many of these items may not be applicable in your case. Or that you may already have many of these documents readily available with you. At the same time, you must see that you have been asked to furnish business plan, sales details etc. Therefore, don’t expect bank to give you money without any effort from your end. You need to be serious in making the loan application.

What Are the Interest Rates for Mudra Loans? What Is the Loan Tenure?

Your bank will decide the interest rate for your loan. Mudra or the Government of India does not control the interest rate or provide any interest rate subsidy. As for any loan, the interest rate will depend on business plan, cash flows, credit score and your repayment ability. The maximum loan tenure for Shishu category loan can be 5 years. The loan tenure for Kishore and Tarun shall be decided by the bank based on business cashflows and credit worthiness. You can also request a moratorium on principal repayment from the bank.

How to Apply for Mudra Loan Online?

You need to go to MudraMitra website (https://mudramitra.in/).

Go to the Login page (https://mudramitra.in/Login)
You need to register on the website, provide details about yourself and your business (plans), select the lender and submit the application. As mentioned before, the bank decides whether to lend to you or not.
To register, Click on “New User” or directly go to this link.
While registering, you will have to enter details such as name, address, gender, caste, business details, mobile number, e-mail and select a username.
You will get an e-mail with the password.
You can now login into to the portal and start filling up the application.
The loan application is a 6-step process.
Step 1: Business Information
Step 2: Information about you and other directors and the partners
Step 3: Details about current banking facilities. If you need support in filing up the application form, you can select an option. Virtual handholding will be provided to you
Step 4: Business performance details (Sales, profit, capital etc)
Step 5: Business registration details and document upload
Step 6: Declaration and Submission
Subsequently, you need to select the lender

Your application will be forwarded to the bank and the bank will act on your application.

Note: I have merely viewed the information needed on the online form and not applied for any loan under Mudra scheme.

What Is a Mudra Card?

In case you opt for Cash Credit or Overdraft scheme, you will get a Mudra card. Using Mudra card, you can withdraw money up to the sanctioned limit from any ATM or swipe at any place. Of course, you have to pay interest on the outstanding amount. When you repay the borrowed amount, the limit becomes available (free) to you again.

You will not get this card if you have applied for term loan (since you have already withdrawn the money).

What Are the Benefits of Taking a Mudra Loan?

You might argue that if you have to provide all the documents and go through the hassles of evaluation and loan documentation, what good is Mudra loan scheme? Well, there are a couple of points you must ponder over.

As per data posted on Mudra website, crores of Indians have already availed loans under the Mudra scheme. Therefore, I believe banks are a little lenient during evaluation. A part of the reason is work that MUDRA does on the institutional side. It provides loan refinancing and securitization facility to banks and participating financial institutions.

Additionally, it shares the risk with the lenders by providing credit guarantee on the portfolio basis (not for individual). The entire Mudra loan portfolio is not covered by a guarantee but only 50% of the portfolio is.

This ensures two things:

Cost of the loan may come down for the end borrower since the bank’s risk has gone down.
Even though you can expect banks or FI to be lenient, banks still have skin in the game. Therefore, they will evaluate loan proposals carefully. If they don’t do this, the Mudra scheme may not achieve its desired purpose.

You do not have to put up any security for the loan. This is a huge positive. Providing upfront security is the biggest challenge for most small businessmen/entrepreneurs. Mudra loan scheme does not require you to provide any collateral.

Useful Links

If you have further queries or grievance, you can mark an e-mail to help@mudra.org.in. Alternatively, you can also approach MUDRA. The contact details are provided at this link.