Why Do Mudra Schemes Have Credit Risks?

There are several factors that set the Mudra loan scheme apart from the usual business loans offered by most commercial lenders. Read on to learn more about these.

• A working capital term loan, the PMMY is disbursed to MSMEs involved in a range of activities, including those allied to the agricultural sector such as food processing, dairy equipment, etc. The target group remains businesses involved in trading, manufacturing or those providing services.
• Essentially devoted towards enabling MSME growth, the Mudra loan scheme can be utilised by companies to meet a wide range of requirements. This could include modernisation of their facilities, capacity expansion, purchase of machinery or even additional plants, renovation of offices or even expansion of their office space.
•  In order to make the MUDRA loan convenient and simple to avail, any eligible MSME can avail the loan online and repay it at their own convenience within a period ranging from 3 to 5 years.

The Bajaj Finserv MSME Loan, available on Finserv MARKETS, is also extremely convenient for small businesses to avail for meeting their capital requirements. With an upper limit of Rs. 30 Lakhs for the loans that can be availed, this unsecured term loan can be repaid over a period ranging from 12 to 60 months.

The PMMY, despite the many advantages it offers to MSMEs, does have several drawbacks in terms of credit risks. Read on below to learn more about these.

• The government’s eagerness for these loans to be available to the masses has led to incidences of officials neglecting due processes in a rush to offer these loans. As a result, the inability of the MSMEs to repay the loan is not realised until much after the loan has already been disbursed. This inability may result in Non-Performing Assets (NPAs) wherein banks may suffer due to the MSMEs not returning the capital borrowed.
• Since the Mudra loan scheme is unsecured, borrowers are not required to provide collateral to borrow the loan amount. Collateral is usually a guarantee provided by the borrowers that can be used to recover the loan amount if they are unable to repay the loan. However, in the absence of collateral, banks have a lot to lose if these MSME units are unable to make the repayment on the loan.
• The Mudra loan is meant for small businesses which require small amounts, but the nature of most of these businesses and the associated volatility may result in these loans becoming NPAs. For instance, a vegetable vendor may avail a Mudra loan. However, his business requires him to move around in search for better profits, and he may be able to get away with never making the repayment for a Mudra loan.
• There have been concerns that the public banking system, which is disbursing these loans, may not be adequately staffed for recovering these loans. Considering that a large number of loans are being disbursed to a large number of borrowers, public banks may not have the required number of employees to track down the borrowers and ensure repayment.

The Mudra loan, despite being a great initiative by the government for furthering the growth of MSMEs, has several credit risks that might be harmful to the economy in the long run. It is necessary for the government to not just identify these risks but also work towards mitigating them at the earliest.

Small businesses, however, have a range of options available in terms of receiving capital for growing their business. The Bajaj Finserv MSME Loan, available on Finserv MARKETS, is available for all business owners between the ages of 26 to 66 years with a business that has been operational for more than 3 years. Any business that meets these criteria can avail an unsecured loan of up to Rs. 30 Lakhs and repay it over a flexible duration of 12 to 60 months.

You can read more about Government Business Loan Schemes in India.

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