Disadvantages of Mudra Loan

Disadvantages of Mudra Loan

One of the most persistent problems that Indian economy is facing is the inequitable distribution of funds. The larger portion of the capital is available to the bigger companies whereas too little of the capital is distributed to micro, small and medium business sector. At present the non-profit micro financing institutes (MFI’s) are not able to provide enough support to small businesses. The commercial banks are also hesitant to provide funds to small and medium entrepreneurs. They avoid exposure to this particular segment because they consider it highly risky in nature with no performance history.

The Government of India’s new Mudra Yojana (Micro Units Development & Refinance Agency Ltd.) aims to cater to the needs of the Non-Corporate Small Business Segment (NCSBS) of the country. Mudra bank will have a corpus of Rs. 200 Billion for refinancing of both for-profit and non-profit MFIs. The credit guarantee corpus of the scheme is Rs. 30 Billion.

The Mudra Bank has proposed to offer loans up to Rs. 1 million to small businesses. The small companies are classified in three groups; Shishu companies are eligible to avail loans up to Rs. 50,000, Kishore companies are eligible to avail loans up to Rs. 5 lakhs and Tarun companies are eligible to avail loans up to Rs. 10 lakhs. Although the Mudra Yojana has many benefits, there are certain downsides to it as well.

Disadvantages of Mudra Yojana

The Mudra Bank Yojana of the government of India is at its initial stages. There are many questions that need to be answered.

  • There are a number of already existing refinancing agencies

At present, there are several refinancing agencies in India, which aim to meet the funding requirements of micro and small businesses. NABARD an acronym for The National Bank for Agriculture and Rural Development was set up in July 1982. Its aim was to make available credit support and services to the rural and farming segment of the country and also encouraging fair growth which is also sustainable. SIDBI was another refinancing agency which was set up in April 1990. It is the acronym for Small Industries Development Bank of India. The main goal of SIDBI was to lend money to the small and medium business as well as their development and promotion. These refinancing agencies were not successful in fulfilling their objectives. As such the benefits of creating a new agency instead of focusing the resources on restructuring the already existing agencies are not clear. Instead of creating the new agency, it could be better to energize the exiting agencies by restructuring and broadening their scope.

  • There is a potential of conflict of interest due to the nature of roles and responsibilities of Mudra Bank.

Mudra Bank has a number of roles and responsibilities. The primary responsibility of Mudra bank is to refinance the MFI’s which are lending finances to the micro and small business segment of the country. Not only this, the Mudra bank’s primary responsibility will also include setting down policies and guidelines for financing micro and small businesses and regulating and rating MFIs. Apart from that, it will also be responsible for client protection, recovery methods, developing standardized covenants to govern last mile lending, providing technological solution to last mile, devising and running credit guarantee scheme and creation of better structure for last mile credit delivery. When the same institution is in charge of both lending the micro and small businesses as well as regulating the micro lending industry, the conflict of interest may arise at a later stage.

  • Mudra bank seems to promote shadow banking.

Shadow banking is globally discouraged as it is considered one of the flaws of the current financial system which leads to global crisis. At this stage, Mudra bank seems to be promoting shadow banking as its operations are not under the administration and regulation of Reserve Bank of India (RBI). As such, there is a chance of potential operational risk when Mudra Bank grows in size.

  • There is a better solution to finance micro and small businesses.

It makes more sense to create small banks to finance micro and small business segment or migration of the existing MFIs to small banks than creating one more financing agency. These institutions already have the required domain knowledge to properly fund the micro and small businesses.

  • Multiple regulators for MFIs.

Currently it is the responsibility of RBI to regulate all the MFIs. However, one of the primary responsibilities of Mudra bank is to regulate all the MFIs. This means that now there are two bodies which will regulate the micro lending industry. This will create more problems for the MFIs in future.

  • How Mudra bank is any different from past attempts?

Mudra bank’s objective is to ensure the equitable distribution of the funds. In the past similar attempts were made by the then Prime Minister Indira Gandhi, by nationalizing banks and compelling them to lend to small and micro businesses. This attempt was proved futile in the past. Therefore it is questionable that how Mudra bank initiative will be any different from past attempts.

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8 thoughts on “Disadvantages of Mudra Loan”

  1. Why is not banks interested to Finance because of Commission and enough training to run Industries?

    Branch Officials are not Interested because of Directions in Mudra Loan.

    Honorable Prime Minister of India forgot dishonesty of concerned persons.

  2. Hi,

    I am Neelima , house wife.
    I have experience in computers. Right now I am not able to do job to take care of my children. But I want yarn money by my self. I want to start kids play store and kids library. But I don’t have financial support. am I eligible for the loan. If I am eligible what are the necessary documents to be submit. Pls help me

  3. I have my home loan of 20 lacs from dhfl and I am paying my emi regular from last 18 month,from last 1 year I am not earning from my business because of finance,so if I have home loan can I get mudra loan of 10 lac . My business is of musquito net & all type of massage product, I do wholesale & retail business. my monthly income is above 40000 per month .So can I get mudra loan. Sir pls. reply me.

  4. I AM HAVING A PHARMA BUSINESS SINCE 4 YEARS AND HAVING TRANSACTION IN A PARTICULAR BANK.WHEN APPLIED FOR MUDRA LOAN AFTER SUBMITTING ALL GENUINE DOCUMENTS WHICH BANK PEOPLE WANTED.NOW THEY ARE REJECTING THE LOAN giving a reason that,i didnt maintain minimum balance sometimes.They have charged fine in all those conditions.Is that rejection reason is correct? we didnt find any of these types of informations in mudra scheme creitirea.please somebody throw some light on this matter.

  5. I want to open pre primary school iny area.
    I am graduated from vnsgu.
    I want to loan near 10 lakhs.
    Is it available for me?

  6. He sir! Mere papa pr 2 lacs ka karj hai so me B.sc 2nd year maharaja college jaipur se kar rha hu isleye muje 3 lac ka loan chaeye muje dilane ki kripa kre mo 9602218096

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