Context: Public sector banks (PSBs) have seen a sharp surge in the amount of Mudra loans turning into non-performing assets (NPAs) over the last three years.

Analysis

Pradhan Mantri MUDRA Yojana (PMMY)

• It is an initiative of the Union Ministry of Finance to ‘fund the unfunded’ (non-corporate small business sector).
• Under PMMY, all banks viz. Public Sector banks, Private Sector Banks, Regional Rural Banks (RRBs), State Co-operative Banks, Urban Co-operative Banks, Foreign Banks and Non-Banking Finance Companies (NBFCs)/Micro Finance Institutions (MFIs) – are required to lend to non-farm sector income generating activities below Rs.10 lakh.

PMMY can be availed under Three Categories:

1. Shishu, which will cover loans up to Rs. 50,000;
2. Kishor for loans above Rs. 50,000 and up to Rs. 5 lakh;
3. Tarun for loans above Rs. 5 lakh and up to Rs. 10 lakh.

• It would be ensured that at least 60% of the credit flows to Shishu Category Units and the balance to Kishor and Tarun Categories.
• 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.
• For implementing the Scheme, government has set up a new institution named, MUDRA (Micro Units Development & Refinance Agency Ltd.), for development and refinancing activities relating to micro units, in addition to acting as a regulator for the micro finance sector, in general. 

• MUDRA provides refinance to all banks seeking refinancing of small business loans given under PMMY. 
• MUDRA Ltd has been set up as a subsidiary of Small Industries Development Bank of India (SIDBI).
• PMMY has also created MUDRA bank with a corpus of Rs. 20,000 crore made available from the shortfalls of priority sector lending, to refinance Micro-Finance Institutions through Pradhan Mantri Mudra Yojana.

For all PMMY loans, the following are to be noted.

1. No processing fees;
2. No collateral;
3. Repayment period of loan is extended up to 5 years;
4. Applicant should not be defaulter of any Bank / Financial Institution.

• While these are essentially collateral-free loans up to Rs 10 lakh per account, credit extended against the purchase of vehicles or equipment or machinery have in-built collateral.
• In June 2020, the government approved a scheme for interest subvention of 2 per cent for a period of 12 months, to all Shishu loan accounts.
• Under PMMY, loans for income-generating activities up to Rs 50,000 are termed Shishu loans.
• The interest rate on these loans ranges from 8-10 per cent.