MUDRA Bank – Indian Economy Notes
A Micro Units Development Refinance Agency (MUDRA) Bank was established to provide development and refinancing to commercial banks/NBFCs/cooperative banks for micro-unit loans. MUDRA takes a 'credit-plus approach,' which includes a variety of other services such as financial literacy and addressing skill gaps, information gaps, and so on. MUDRA was founded as a wholly owned subsidiary of the Small Industries Development Bank of India (SIDBI), with SIDBI contributing 100% of the capital. MUDRA's authorised capital is currently (Jan 2022) 1000 crores, and its paid-up capital is 750 crores, fully subscribed by SIDBI.
|
Table of Contents |
What is MUDRA Bank?
- The Micro Units Development Refinance Agency (MUDRA) Bank is a refinancing institution for micro-finance institutions.
- MUDRA is currently conceived not only as a refinance institution, but also as a regulator for microfinance institutions (MFIs).
- MUDRA would be in charge of developing and refinancing the micro-enterprise sector by assisting finance institutions that lend to micro/small business entities engaged in manufacturing, trading, and service activities.
- MUDRA would collaborate with banks, microfinance institutions, and other lending institutions at the state and regional levels to provide microfinance support to the country's microenterprise sector.
- The GOI decided that MUDRA would provide refinancing assistance, monitor PMMY data by managing the web portal, and facilitate the offering of guarantees for loans made under PMMY.
- MUDRA Bank operates through financing institutions, which in turn connect with last mile lenders such as Micro Finance Institutions (MFIs), Primary Credit Cooperative Societies, Self Help Groups (SHGs), Non-Bank Financial Companies (NBFCs) (other than MFIs), and other lending institutions.
- Microfinance institutions (MFIs) can become Member Lending Institutions (MLIs) of MUDRA (SIDBI) Bank for refinancing and National Credit Guarantee Trustee Company (NCGTC) for credit guarantee.
| Other Relevant Links | |
|---|---|
| Types of Banks | Evolution of Banking Sector |
| Non Performing Assets | SIDBI |
| NABARD | Non-Banking Financial Company (NBFC) |
| National Housing Bank | Financial Inclusion |
Historical Perspective
- According to the Government of India, large industries employ only 1.25 crore people in the country, while micro units employ approximately 12 crore people.
- There is a need to focus on the 5.75 crore self-employed people (owners of micro units) who use funds totaling 11 lakh crore, with an average per unit debt of just 17,000 rupees. Capital is essential for small business owners.
- These entrepreneurs rely heavily on local money lenders for their funding needs.
- Given the significance of these enterprises, the Government of India established the Micro Units Development and Refinance Agency Bank (MUDRA Bank) in April 2015 with the goal of funding these unfunded non-corporate enterprises.
- This was introduced as the PMMY (Prime Minister Mudra Yojana).
- The formation of MUDRA Bank was announced in the Union Budget presented by Finance Minister Arun Jaitley for Fiscal Year 2015-16.
- As a result, MUDRA was registered as a company under the Companies Act 2013 in March 2015, and as a non-banking finance institution with the RBI on April 7, 2015.
- MUDRA was launched on April 8, 2015, at Vigyan Bhawan in New Delhi by Prime Minister Narendra Modi.
MUDRA Bank – Important Features
- Under this banking model, micro-enterprises can obtain a loan of up to ten lakh rupees through refinancing (through the Public and private sector banks, NBFCs, MFIs, RRBs, District Banks, etc).
- Its products are divided into three finance buckets: Shishu (loans up to 50,000), Kishor (50,000 to 5 lakh), and Tarun (5 lakh to 10 lakh).
- Despite the fact that the scheme covers fruit and vegetable traders, it does not, in general, refinance the agriculture sector.
- This scheme has no fixed interest rate. According to the Government of India, banks are currently charging interest rates ranging from Base Rate plus 1% to 7% per annum.
- Loan interest rates are supposed to vary based on the risk involved in the enterprises seeking loans. Except when the loan is linked to another government scheme, there is no general subsidy offered on interest rates.
MUDRA Bank – Roles & Responsibilities
- Developing policy guidelines for micro/small enterprise financing businesses.
- MFI registration, regulation, accreditation, and rating
- establishing responsible financing practises to prevent indebtedness and ensure proper client protection principles and recovery methods
- Creation of a standardised set of covenants governing last-mile lending to micro/small businesses.
- Promoting appropriate technology solutions for the lastmile.
- Creating and implementing a Credit Guarantee Scheme to provide guarantees for loans made to micro-enterprises.
- Developing a good architecture for Last Mile Credit Delivery to Micro Businesses through the Pradhan Mantri Mudra Yojana scheme.
MUDRA Bank – Significance
- According to the government, by March 2020, a total of 22.53 crore loans had been sanctioned since the scheme's inception, with a total loan disbursed of around 11.51 lakh crores.
- Under the scheme, approximately 70% of loan recipients are women.
- MUDRA prioritises lending to enterprises established by underprivileged sections of society, particularly those from scheduled caste/tribe groups, first generation entrepreneurs, and existing small businesses.
- There are an estimated 5.77 crore small business units in India, the majority of which are sole proprietorships that operate small manufacturing, trading, or service businesses. Sixty-two percent of these are owned by SC/ST/OBC.
MUDRA Bank – Challenges
- The rise in non-performing assets in the case of Mudra loans has been a source of concern for both the government and the RBI.
- According to the Ministry of Finance, net NPAs under Mudra loans increased to 2.88 percent between April and December 2019 (against 2.52 per cent of the same period in 2018).
Conclusion
MUDRA was formed with the primary goal of developing the country's micro enterprise sector by providing various supports, including financial support in the form of refinance, in order to achieve the goal of funding the unfunded.
| Other Relevant Links | |
|---|---|
| Indian Economics Notes | Banking Sector in India |
| Inflation | Financial Markets |
FAQs
Question: What is Mudra Bank?
Answer: Mudra Bank, officially known as the Micro Units Development and Refinance Agency (MUDRA), was established in 2015 to provide financial support to small and micro enterprises in India. It aims to facilitate easy access to credit for small businesses, thereby promoting entrepreneurship and employment generation.
Question: What are the objectives of Mudra Bank?
Answer: The primary objectives of Mudra Bank include providing financial assistance to micro and small enterprises, promoting self-employment, and enhancing the credit availability for the unorganized sector. The bank aims to empower small businesses to grow and contribute to the economy.
Question: How does Mudra Bank disburse loans?
Answer: Mudra Bank does not lend directly to individuals. Instead, it provides refinancing support to banks and financial institutions that offer loans to micro and small enterprises. It operates through three categories of loans: Shishu (up to ₹50,000), Kishore (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh).
Question: What role does Mudra Bank play in the PMMY scheme?
Answer: Mudra Bank is the implementing agency for the Pradhan Mantri Mudra Yojana (PMMY), which aims to provide financial support to micro and small enterprises. Through PMMY, Mudra Bank facilitates loans to entrepreneurs and small business owners, promoting self-employment and small business growth.
Question: What is the impact of Mudra Bank on the Indian economy?
Answer: Mudra Bank has a significant impact on the Indian economy by enhancing access to credit for small businesses, which form the backbone of the economy. By promoting entrepreneurship, it helps create jobs, reduce unemployment, and contribute to economic growth. Its initiatives support financial inclusion and empower marginalized sections of society.
MCQs
- What year was Mudra Bank established?
a) 2013
b) 2014
c) 2015
d) 2016
Answer: (C) See the Explanation
c) 2015. Mudra Bank was established in 2015 as part of the Pradhan Mantri Mudra Yojana to support small businesses.
- Which of the following is NOT a category of loans provided by Mudra Bank?
a) Shishu
b) Kishore
c) Tarun Plus
d) Tarun
Answer: (C) See the Explanation
c) Tarun Plus. The categories of loans provided by Mudra Bank are Shishu, Kishore, and Tarun.
- What is the maximum loan amount that can be availed under the Tarun category?
a) ₹50,000
b) ₹1 lakh
c) ₹10 lakh
d) ₹5 lakh
Answer: (C) See the Explanation
c) ₹10 lakh. The Tarun category allows loans ranging from ₹5 lakh to ₹10 lakh.
- Which scheme is implemented by Mudra Bank to support micro and small enterprises?
a) Stand-Up India
b) Pradhan Mantri Mudra Yojana (PMMY)
c) Atmanirbhar Bharat
d) Skill India
Answer: (B) See the Explanation
b) Pradhan Mantri Mudra Yojana (PMMY). Mudra Bank is the implementing agency for this scheme.
- What is the primary target group for Mudra Bank's financial assistance?
a) Large Corporates
b) Micro and small enterprises
c) Agricultural sectors
d) Government departments
Answer: (B) See the Explanation
b) Micro and small enterprises. Mudra Bank specifically targets small businesses and entrepreneurs.
GS Mains Questions and Model Answers
Q1: Discuss the significance of Mudra Bank in promoting entrepreneurship in India.
Answer: Mudra Bank plays a crucial role in promoting entrepreneurship in India by facilitating access to credit for micro and small enterprises, which are vital for economic growth and job creation. The establishment of Mudra Bank under the Pradhan Mantri Mudra Yojana (PMMY) has enabled millions of entrepreneurs, particularly from marginalized sections, to secure funding that was previously difficult to obtain due to stringent lending norms of traditional banks. By categorizing loans into Shishu, Kishore, and Tarun, Mudra Bank caters to the varying needs of businesses at different stages of growth. Its emphasis on refinancing financial institutions ensures that small businesses can access necessary funds with minimal bureaucratic hurdles. This support is particularly significant in a country like India, where small and medium enterprises contribute substantially to the GDP and employment. Furthermore, Mudra Bank's initiatives help in promoting financial inclusion, as they encourage individuals to enter the formal credit system, ultimately contributing to the overall economic development of the country.
Q2: Analyze the challenges faced by Mudra Bank in achieving its objectives.
Answer: While Mudra Bank has made significant strides in promoting entrepreneurship and financial inclusion, it faces several challenges in achieving its objectives. One major challenge is the limited outreach to the actual beneficiaries, particularly in rural areas where awareness about Mudra schemes may be low. Despite the efforts to promote the Pradhan Mantri Mudra Yojana (PMMY), many potential borrowers remain unaware of the loan categories and application processes. Additionally, the quality of credit assessment by banks and financial institutions can sometimes lead to suboptimal lending, with loans being disbursed to borrowers who may not have viable business plans, leading to higher default rates. Furthermore, the pressure to achieve disbursement targets may result in financial institutions compromising on due diligence, which could undermine the sustainability of the scheme. The absence of a robust monitoring and evaluation mechanism also poses challenges in assessing the impact of loans on the businesses and the economy. Addressing these challenges is crucial for Mudra Bank to enhance its effectiveness and fulfill its mandate of supporting small enterprises.
Q3: Evaluate the impact of Mudra Bank on the informal sector in India.
Answer: The impact of Mudra Bank on the informal sector in India is substantial, as it serves as a vital source of credit for micro and small enterprises, which predominantly comprise the informal economy. By providing financial assistance through the Pradhan Mantri Mudra Yojana (PMMY), Mudra Bank has facilitated the formalization of numerous informal businesses, enabling them to access credit, improve operations, and increase competitiveness. The availability of loans without the stringent requirements typically imposed by traditional banks allows many entrepreneurs in the informal sector to pursue their business ventures. Additionally, the categorization of loans into Shishu, Kishore, and Tarun caters to the varying needs of businesses at different stages, ensuring that even the smallest enterprises can benefit from financial support. However, challenges remain, such as the need for financial literacy among informal sector players to effectively utilize the funds. Overall, Mudra Bank's initiatives contribute significantly to enhancing the livelihoods of individuals in the informal sector, driving economic growth, and promoting self-employment in India.
Previous Year Questions on MUDRA Bank
1. UPSC CSE Mains 2019
Question: Examine the role of Mudra Bank in enhancing financial inclusion in India.
Answer: Mudra Bank plays a critical role in enhancing financial inclusion in India by providing accessible credit to micro and small enterprises, which form a significant part of the economy but often lack access to formal banking services. The establishment of Mudra Bank under the Pradhan Mantri Mudra Yojana (PMMY) has enabled individuals, especially from marginalized communities, to secure loans without the stringent collateral requirements typically associated with traditional banking. By categorizing loans into Shishu, Kishore, and Tarun, Mudra Bank addresses the diverse needs of entrepreneurs at different stages of their business journey. This inclusivity is essential in a country where a large percentage of the workforce is engaged in informal employment. The emphasis on supporting self-employment and entrepreneurship helps uplift economically weaker sections, contributing to poverty alleviation and economic development. Moreover, the integration of technology in loan disbursement and monitoring enhances efficiency and accountability. Overall, Mudra Bank significantly advances the agenda of financial inclusion by empowering small businesses and fostering a culture of entrepreneurship across the country.
2. UPSC CSE Mains 2020
Question: Discuss the impact of Mudra Bank on small-scale industries in India.
Answer: Mudra Bank has had a profound impact on small-scale industries (SSIs) in India by facilitating easier access to credit, which is crucial for the growth and sustainability of these enterprises. By offering loans under the Pradhan Mantri Mudra Yojana (PMMY), Mudra Bank supports SSIs at various stages of development, allowing them to fund their operations, expand their reach, and innovate. The loan categories—Shishu, Kishore, and Tarun—ensure that businesses of different sizes can access appropriate financing tailored to their specific needs. This support has empowered many small entrepreneurs to formalize their businesses, leading to increased productivity and competitiveness in the market. Additionally, the emphasis on promoting self-employment and entrepreneurship has encouraged job creation, contributing to economic development. However, challenges such as inadequate financial literacy among some entrepreneurs and the need for ongoing support in business development remain. Addressing these issues will further enhance the positive impact of Mudra Bank on the growth and sustainability of small-scale industries in India.
Download the PREPP App and attempt FREE IAS Exam Mock Tests and get complete study material!
UPSC IAS : GS - Indian Economy - Subject Knowledge Test
Live Test : UPSC CSE Prelims CSAT (Paper-II) (July 22 - 25)
UPSC CSE Prelims 2026 GS Paper 1 Question Paper (24-May-2026)
UPSC CSE Prelims 2026 CSAT Paper 2 Question Paper (24-May-2026)
17 February 2025 | The Hindu Must Read Articles | Current Affairs
16 February 2026 | The Hindu Must Read Articles | Current Affairs
13 February 2026 | The Hindu Must Read Articles | Current Affairs
Comments