What is Mudra Loan?
A Mudra Loan is a financial assistance scheme run by the government of India under the Pradhan Mantri Mudra Yojana (PMMY) with a goal to provide financial assistance in the form of more accessible loans to Micro Small and Medium Enterprises (MSME) in the country. This scheme. Under these schemes the eligible businesses can avail a loan of up to INR 10 lacs.
Mudra Loan Categories:
There are different Mudra Loan Categories offered under the Pradhan Mantri Mudra Yojana: Shishu, Kishore, and Tarun Each mudra classification i.e. Shishu, Kishore, and Tarun signify different stages of business. Shishu means business at an infant age, Kishore means business at an adolescent age, and Tarun means business at Young age. Let’s take a detailed look at different Mudra Loan types to understand The differences between Shishu, Tarun and Kishore Mudra loans better:
- Shishu
Under the Shishu category of Mudra loans, the businesses at the budding or ideation stage are eligible to avail business loans. Under Shishu Yojana, the entrepreneurs can avail a loan to start their business. Since, loans under the Shishu Mudra Loan category of Mudra Loans are to motivate budding entrepreneurs, the total sum that can be availed through this Yojana is small. The entrepreneurs may opt for a loan up to INR 50,000. These loans are easy to avail, and an entrepreneur may visit their nearest bank or lending institutions to enquire on the same.
- Kishore
Kishor Mudra Yojana is targeted towards already established businesses in the micro, small and medium enterprises (MSME) categories, that require debt capital injection between INR 50,000 and INR 5 lacs. Kishore Mudra loans are perfect for businesses that are looking to secure debt funding to fund their working capital requirement. Unlike many business loan offerings, these loans are collateral free, and are offered at lower interest rates with an aim to promote the MSME sector in the country. Kishore Yojana makes up for a major chunk of loans distributed through the Mudra Yojana, as the amount offered under this scheme covers a wide range of businesses with respect to their scale, and requirements.
- Tarun
Under the Pradan mantri Mudra Yojana (PMMY) the maximum amount that can be availed by the micro, small, and medium enterprises is INR 10 lacs, now for businesses at an infant stage requiring capital to either start a business or to operate it efficiently, would require loans of lesser amount i.e. up to INR 5 lacs those business qualifies for loans under Shishu, and Kishore Yojana respectively. However, for businesses at a more matured stage that requires debt capital injection to fund purposes such as expansionary plans into new product lines, or expansion of branches in a new geography, such businesses are eligible to apply for Tarun Mudra loans under this Yojana. In this yojana, the businesses can avail a loan from INR 5 lacs up to INR 10 lacs. Tarun Mudra loan for business expansion can be availed depending on the business type and stage.
How to Choose the Right Loan Category?
Choosing between different type of loan offer under the Mudra Yojana can be overwhelming. If you are also struggling wondering how to choose between Shishu, Kishore or Tarun loan, then here are a few points to keep in mind:
- Business Stage
Certain yojanas under the mudra loan scheme are more suitable for businesses depending upon the stage of your business, be it the budding stage, where the entrepreneur may need loan to start a business, to fund operations to keep the business afloat, funding requirement for working capital, investing in expansionary project, among many more purposes.
Depending upon the business stage, the entrepreneur can opt for Shishu, Kishor, or Tarun Yojana, under each scheme there is a cap on the total amount of loan that can be secured
- Loan Amount
Loan amount may vary depending on the purpose for which an entrepreneur may need a loan. It is one of the most important aspects to take into consideration when an entrepreneur is looking to avail a loan. This roots from the reason why the business is in need of a capital injection.
If the entrepreneur is planning to avail loan from the PMMY scheme, there are multiple schemes available, all with different loan amounts. For an example – if the entrepreneur needs a loan of INR 7 lacs, then they would not be eligible to apply for a loan under Shishu, or Kishore Yojana, however Tarun Yojana would be a perfect fit. Hence, it is essential to first understand the requirement as to what is the loan amount that the business needs to fulfill the purpose behind availing a loan.
- Repayment Capacity
Before opting for a loan, the applicant should always take their repayment capacity into consideration. There are many factors that determine the business’ repayment capacity, the major factor being the revenues that the business is able to generate, apart from that the net profits, cash conversion cycle, balances float in the banks, among many other factors.
Based on the repayment capacity, and the capital requirement should an entrepreneur opt for a loan, if the requirement is really low to fulfill small commitments then a Shishu mudra loan may suffice the needs. However, if the entrepreneur requires capital injection for working capital requirements up to INR 5 lacs, then a loan under Kishor Mudra Yojana would best suit the needs, if the capital requirement is high i.e. up to INR 10 lacs, then the entrepreneur may look at securing a loan under Traun Mudra Yojana.
- Business Purpose
Business purposes are one of the main determinants for securing a business loan. There are a flurry of loan products available in the market, all designed to cater to a specific need. Hence, it is essential for the entrepreneurs to determine the purpose of taking a loan. If the purpose is to secure funding to start a business, then loans of smaller sums would be best suitable. In such cases, the entrepreneurs may opt for a Shishu Mudra loan. However, an entrepreneur with a slightly mature business may look at securing debt funding for working capital requirements. In such cases, Kishor Mudra loan would best serve the purpose. Lastly, if the requirement is heavy on money like expansionary projects, then the entrepreneur may look at loans offering bigger funding like Tarun Mudra loans to serve the needs.
A careful examination of all these factors can help you find an answer of “which Mudra loan category is right for my business”.
Advantages and Disadvantages
Each type of loan under the Mudra Yojana has their set of benefits and certain limitations. Let’s take a look Mudra loan benefits and also evaluate the cons carefully:
1. Shishu
- Advantages: The biggest advantage of Shishu Mudra Loans is the ease of securing these loans, considering the fact that these loans are designed to cater to small businesses in need of loans to start the operations, the eligibility criteria for Mudra loan is not strict, and an entrepreneur can avail this loan with basic documentation. With easy Shishu loan eligibility criteria, businesses can benefit from quick financing.
- Disadvantages: The biggest disadvantage of Shishu loans is that the cap on the maximum loan amount that can be availed under this Yojana is very low i.e. INR 50,000. This is unsuitable for entrepreneurs planning to start a business at a slightly larger scale, making applicants with higher loan needs ineligible.
Pro Tip: Visit the official government website to find a detailed guide on how to apply for Shishu Mudra loan online.
2. Kishore
- Advantages: There are several benefits of Kishore Mudra loan for small businesses. Kishore Mudra Loans is one of the best when it comes to availability, and the broad spectrum of business it can support. Entrepreneurs of small business in need of loan funding to invest in working capital, increase in inventory, or in expansionary projects can avail loan under this scheme. As the highest available loan under Kishore is INR 5 lacs, it can serve businesses at various stages of their life cycle. Additionally, the documents needed for Kishor loan application are minimal and typically get approved quickly. It is advised to check the Tarun loan eligibility criteria to avoid any hassle.
- Disadvantages: The disadvantage of Kishore Mudra loans being that with higher loan amount comes higher repayments, and businesses at an immature stage of lifecycle may not be ready to take up the commitment.
3. Tarun
- Advantages: Although Mudra schemes are designed to serve businesses under the micro, small, and medium enterprises category, however for the businesses operating at a larger scale under these categories, may not have their requirement fulfilled due to low cap on the maximum amount. The Tarun Yojana under the Mudra Scheme solved this problem by allowing businesses to avail loans between INR 5 lacs and INR 10 lacs, which can be beneficial for MSMEs especially the ones growing at a rapid phase. The repayment terms for Tarun Mudra loan are flexible.
- Disadvantages: The only disadvantage from the applicant’s perspective may be the stricter Tarun loan eligibility, and selective disbursal of loan. Since these schemes are designed to extend the benefit of easy loans for growing MSMEs, the businesses applying for higher loan amounts may have to go through stricter mudra loan eligibility criteria to avail the same.
Common Mistakes to Avoid when Choosing a Mudra Loan
- Underestimating business requirements
More often than not the entrepreneurs estimate expenses related to a special purpose, and end up massively underestimating the total capital requirement for the same. This has a negative impact when the entrepreneurs rely on an external source for funding such expenses like loans. Such dependency on the estimates is counterproductive in case of loans because, an entrepreneur may end up applying for a loan value matching to that of the requirement, however in case where the actual expenses end up exceeding the estimates, then arranging for the deficit capital becomes really difficult, since loan top up may not be available so soon, and the entrepreneur may have to rely on other sources for securing funds to take the project across the finish line.
- Failing to assess repayment ability
Mudra loan repayment terms have been designed for flexibility. However, correctly assessing the repayment ability is absolutely essential to ensure smooth repayment. Although the lenders make this assessment, the borrower should also assume this responsibility as failing to do so results in irresponsible borrowing, which can have severe impacts like difficulty in repayment of loans, missed repayments, falling credit score, difficulty in managing cashflow for business operations, among many others.
The entrepreneur can make the correct assessment by taking multiple factors into consideration like, business’ current revenues and the expected increase post funding injection, profits, inventory levels, cash conversion cycle, debt to equity ratio, current outstanding loans, and financial commitment, and average balances, among many other factors. Making decisions based on these factors can help an entrepreneur avoid monetarily uncomfortable situations rooting from irresponsible borrowing.
- Choosing a loan category based on convenience rather than suitability
More often than not, entrepreneurs in need for a loan end up taking the most easily available loan while not comparing the offerings in the market. This act of choosing convenience over suitability can have a negative financial impact on the business. As in such cases, an entrepreneur may end up taking loans that offer a higher interest rate, unsuitable terms, inflexible repayment, among many others. Make sure to carefully evaluate the updated interest rate for different Mudra loan categories as typically Mudra loan interest rates are periodically amended.
Hence, it is essential that the entrepreneur filter through the available loan options based on the suitability, and not the ease of availability.
- Ignoring the Eligibility criteria and application process.
Remember that the government does not offer Mudra loan directly to the borrower, rather the applicant can apply for a loan with the nearest authorised bank. Make sure to check the Mudra loan application process to avoid any delays or latches in the approval.
Conclusion
In summary, the category of Mudra Loan—Shishu, Kishore, or Tarun—is to be selected according to your business stage, loan amount, repayment capacity, and for what specific purpose the fund is needed. The entrepreneurs in the early stages of their ventures can avail themselves of the Shishu loan that allows up to INR 50,000 as a smaller loan amount to begin operations. Businesses that are a little older and require finance to keep running the businesses or expanding the operations can take the Kishore loan, which gives the amount ranging from INR 50,000 to 5 lakhs. More mature MSMEs looking for expansion funds or diversification funds should take the Tarun loan, which offers up to 10 lakhs. Before applying for a loan under the Mudra Yojana, applicants must keep all the documents required for Mudra loan handy.
It is crucial to assess the business’ financial requirements aptly to avoid underestimating the capital needs, as well as evaluate the repayment capacity to ensure smooth loan repayment. There are various loan offerings available in the market, but selection of loans based on the entrepreneur’s convenience rather than suitability may lead to unfavorable terms from the lenders, and increased financial burden on the business. Understanding the business needs and available loan products can help entrepreneurs to make an informed decision. Proper planning and understanding about Mudra loan options will help businesses reap all the financial support the scheme provides under PMMY so that they can emerge from such competitive markets.
