MUDRA Bank

The Micro Units Development and Refinance Agency (MUDRA) Bank is an Indian financial institution established to promote and finance micro and small enterprises (MSEs) that operate in the non-corporate, unorganised sector. Launched on 8 April 2015 by the Government of India, MUDRA Bank is a key initiative under the Pradhan Mantri MUDRA Yojana (PMMY), aimed at providing credit support to small entrepreneurs, thereby strengthening the foundation of inclusive economic growth and job creation.

Meaning and Concept

MUDRA Bank functions as a refinancing and development agency for micro and small business units. Its primary role is not to lend directly to borrowers but to provide refinance support to banks, microfinance institutions (MFIs), and non-banking financial companies (NBFCs) that extend credit to small entrepreneurs.
The term MUDRA stands for Micro Units Development and Refinance Agency — reflecting its dual purpose of development and refinancing. It was created to address the long-standing problem of lack of formal credit for micro enterprises, which form a major part of India’s informal economy.

Background and Establishment

Before the establishment of MUDRA Bank, a large section of India’s micro and small businesses relied on informal sources of finance such as moneylenders, friends, and local financiers. The unavailability of institutional credit limited their growth and kept them outside the formal financial system.
To address this gap, the Government of India announced the formation of MUDRA Bank in the Union Budget 2015–16. It was set up as a wholly-owned subsidiary of the Small Industries Development Bank of India (SIDBI).
MUDRA was later integrated into the Pradhan Mantri MUDRA Yojana (PMMY) framework, making it the central agency for implementing and monitoring the scheme nationwide.

Objectives of MUDRA Bank

1. To provide refinance support to banks, MFIs, and NBFCs for lending to micro and small enterprises.
2. To promote financial inclusion by integrating small business owners into the formal financial system.
3. To develop and regulate microfinance institutions engaged in lending to micro units.
4. To help micro entrepreneurs access adequate and affordable credit.
5. To promote self-employment and job creation by supporting small and unorganised sector businesses.
6. To standardise and strengthen lending practices to the micro sector.
7. To bring the ‘funding the unfunded’ philosophy into practical implementation.

Functions of MUDRA Bank

• Refinancing: Provides refinance to microfinance institutions, NBFCs, and banks that lend to micro and small enterprises.
• Funding Support: Facilitates funding for institutions engaged in micro-enterprise financing.
• Credit Guarantee: Plans to establish a Credit Guarantee Fund to reduce the risk for lending institutions.
• Developmental Role: Offers capacity building, training, and financial literacy support to entrepreneurs.
• Policy Formulation: Acts as a regulator for microfinance institutions to promote responsible lending.
• Technology and Innovation: Promotes the use of digital platforms for credit delivery and monitoring.

Categories of MUDRA Loans

Under the Pradhan Mantri MUDRA Yojana (PMMY), loans are classified into three categories based on the stage of growth and funding needs of the micro business:

Each category represents a progressive funding model that supports micro-entrepreneurs from start-up to growth phase.

Eligibility for MUDRA Loans

MUDRA loans are available to:

• Small manufacturing units.
• Traders, shopkeepers, vendors, and artisans.
• Small service providers.
• Non-farm enterprises engaged in food processing, transport, or handicrafts.

Note: Loans under PMMY are available only to non-farm enterprises engaged in income-generating activities.

Institutions Eligible for Refinance from MUDRA

• Commercial banks.
• Regional Rural Banks (RRBs).
• Small Finance Banks (SFBs).
• Cooperative banks.
• Microfinance institutions (MFIs).
• Non-Banking Financial Companies (NBFCs).

Key Features of MUDRA Loans

• Collateral-Free Loans: MUDRA loans are unsecured; no collateral or third-party guarantee is required.
• Interest Rates: Determined by individual lending institutions, usually lower than traditional informal credit sources.
• Repayment Period: Flexible repayment tenures ranging from 3 to 5 years.
• Credit Guarantee: MUDRA provides credit guarantee coverage to reduce risk to banks.
• Women Entrepreneurship Focus: Special emphasis on women-owned enterprises through concessional interest rates.
• Digital Platforms: Integration with e-MUDRA portal for paperless loan processing.

Implementation of MUDRA Yojana

• Implemented through a network of lending institutions, including banks and NBFCs.
• Borrowers apply directly to banks or through the Udyam Registration Portal.
• MUDRA monitors and supports the scheme by providing refinance and evaluating performance.

Performance and Achievements

Since its inception, the MUDRA Yojana has significantly contributed to expanding microenterprise financing in India.

• As of March 2025, over 42 crore loans have been sanctioned under PMMY, amounting to more than ₹25 lakh crore.
• Around 68% of total borrowers are women, and 51% belong to SC/ST/OBC categories, highlighting the inclusive nature of the scheme.
• It has played a vital role in boosting self-employment and micro-entrepreneurship, especially in rural and semi-urban areas.

Advantages of MUDRA Bank

For Entrepreneurs:

• Easy access to formal credit without collateral.
• Encourages self-employment and small business development.
• Promotes financial independence, particularly for women and rural youth.

For the Economy:

• Strengthens the microenterprise sector, which forms the backbone of India’s economy.
• Creates large-scale employment opportunities.
• Enhances financial inclusion and reduces dependence on informal lenders.
• Supports the government’s vision of “Atmanirbhar Bharat” (Self-Reliant India).

Challenges and Limitations

• High Credit Risk: Micro borrowers often lack financial literacy and collateral, leading to repayment difficulties.
• Monitoring Issues: Ensuring proper end-use of funds remains challenging.
• Limited Awareness: Many eligible entrepreneurs are unaware of MUDRA’s benefits.
• Overlapping Schemes: Multiple credit schemes sometimes cause duplication and inefficiency.
• Non-Performing Assets (NPAs): Rising NPAs in small loans have been observed in some institutions.

Difference Between MUDRA Bank and a Commercial Bank

Role of MUDRA Bank in Financial Inclusion

• Bridges the credit gap for micro and small businesses.
• Empowers weaker sections and women entrepreneurs.
• Encourages formalisation of the informal economy.
• Promotes entrepreneurship in rural and semi-urban areas.
• Acts as a catalyst for socio-economic transformation.