The Pradhan Mantri MUDRA Yojana (PMMY) was launched in 2015 by the Narendra Modi government. The initiative, which focused on igniting entrepreneurship, provided collateral-free micro-loans up to
Rs 10 lakh and supported numerous small and microenterprises. The Union Budget 2024 has increased the loan amount to Rs 20 lakh.
The Budget has targeted the scheme’s Tarun category for enhancement, doubling the upper loan limit to Rs 20 lakh. The move is set to benefit those who have already availed of and repaid previous MUDRA loans under this category. It is time to move towards a new version of the scheme – MUDRA 2.0. But before that, we should also assess the success of MUDRA 1.0, tackle its challenges and suggests ways to enhance its benefits.
The first phase of the scheme disbursed over Rs 27.75 lakh crore to 47 crore small and new entrepreneurs. This has significantly impacted the grassroots economy and offered financial lifelines to a section of population which had earlier been excluded from formal credit systems. Its inclusive approach is a key feature of the scheme. About 69 per cent of the MUDRA loan accounts are held by women, and 51 per cent belong to SC/ST and OBC entrepreneurs. Focusing on marginalised groups has helped promote gender equality and foster social equity, allowing a wider section of society to participate in the country’s economic growth. The initiative has also been crucial in creating jobs, especially in rural and semi-urban areas. It has encouraged self-employment and supported the development of small businesses.
Despite its success, MUDRA 1.0 faced several challenges. One critical issue was ensuring that benefits reached the intended target groups, particularly the smallest and most marginalised entrepreneurs. While the scheme disbursed over 47 crore loans, the uptake was skewed. Rural and remote regions lagged behind, underscoring the need for more focused outreach. In 2021-22, the top 10 districts were sanctioned more than Rs 26,000 crore. This is about the same as that sanctioned for the bottom 318 districts that year, indicating unequal distribution of credit across regions. Inadequate monitoring and implementation led to leakages and misuse of funds. However, the proportion of the non-performing assets (NPAs) under the scheme has come down 3.61 per cent in FY21 to 2.1 per cent in FY24.
From FY 20 to FY 22, NPAs under the Kishore category (loans ranging between Rs 50,001 and Rs 5 lakh) and Shishu category (loans up to Rs 50,000) made up more than 75 per cent of the bad loans under the scheme. The NPA percentage of the Kishore category was consistently above 4 per cent from FY20 to FY22, whereas the combined NPA was 2.53 per cent, 3.61 per cent and 3.17 per cent for FY20, FY21 and FY24. The higher NPAs under the Shishu and Kishore categories are due to a lack of business knowledge and skills among early-stage entrepreneurs.
The total exposure of MUDRA loans per year has increased consistently since the scheme’s inception, barring FY21, the year of the Covid pandemic. In FY22, the total exposure under the scheme was Rs 3.3 lakh crore. By FY 2024, this crossed the Rs 5 lakh crore mark. However, maintaining quality credit appraisal processes amidst increased lending pressures remains challenging.
The limited financial literacy of beneficiaries was another significant challenge. Many first-time borrowers lack the knowledge to manage their loans effectively, leading to defaults and financial mismanagement. Only 27 per cent of the country’s population is financially literate. The ability to manage loans is, therefore, limited. This has resulted in loan defaults and mismanagement of funds. The lack of a robust credit guarantee mechanism also made banks hesitant to lend, further constraining the growth of small enterprises.
In light of this experience, MUDRA 2.0 should widen its scope, improve its effectiveness, and establish a robust support system for micro-entrepreneurs. For this, a focused outreach and empowerment zone should be set up in rural and semi-urban areas. They can function as centres where micro-entrepreneurs can access comprehensive services, including financial literacy programmes, mentorship, and business support. By consolidating these resources, the government can create an environment that empowers small businesses. Data analytics and beneficiary tracking systems will aid in identifying and supporting enterprises in need of assistance, furthering the cause of empowerment.
MUDRA 2.0 should introduce nationwide financial literacy programmes covering budgeting, savings, credit management, investment strategies, and digital literacy. This will empower entrepreneurs with the knowledge to manage their finances effectively, reduce default rates, improve financial health, and enhance business operations. MUDRA 2.0 should include the Enhanced Credit Guarantee Scheme (ECGS) to encourage banks to lend more to small and micro enterprises. This scheme provides a credit guarantee and reduces the risk for financial institutions.
MUDRA 2.0 should implement a Robust Monitoring and Evaluation Framework (RMEF) leveraging technology to track loan disbursements, utilisation, and repayments in real-time. This will ensure transparency, minimise misuse, and improve the scheme’s efficiency, building stakeholder trust. The RMEF will also include beneficiary impact assessments to measure socio-economic outcomes and provide insights for policy enhancements.
The writer is Professor of Finance, XLRI Xavier School of Management and a BJP member
