Pradhan Mantri Mudra Yojana: Credit saturation for livelihoods

Soumya Kanti Ghosh *

The scheme has supported small enterprises and revitalized the Indian micro-credit ecosystem in its eight years of existence

As India’s Pradhan Mantri Mudra Yojana (PMMY) completed eight years on 8 April, we can glance back at the changes wrought by this mass credit saturation programme that was envisaged during the bleak days of 2014-15 when our formal financial sector was reeling under bad loans, especially its impact on the sociocultural fabric of the country.

The PMMY is one of the flagship schemes of the Union Government to encourage self-employment. The scheme targets micro and own-account enterprises that constitute a vibrant business ecosystem in India. Micro enterprises are mostly engaged in manufacturing, processing, trading and services, and many of these units are single-ownership businesses.

The country’s formal or institutional architecture was unable to reach out to them and meet their financial requirements. These units were largely self-financed or reliant on either personal networks or money lenders.

With this gap kept in mind, the PMMY was floated with the objective to create an easily accessible bridge between a large unbanked sector and formal lenders. Launched in 2015, PMMY provides collateral-free institutional credit up to Rs 10 lakh, as provided by Member Lending Institutions (MLIs): ie, Scheduled Commercial Banks (SCBs), Regional Rural Banks (RRBs), Non-Banking Financial Companies (NBFCs) and Micro Finance Institutions (MFIs).

Under the aegis of the PMMY, the Micro Units Development and Refinance Agency (MUDRA) created three sub-schemes that differ by the loan amount: Shishu (for loans up to Rs 50,000), Kishore (Rs 50,001–Rs 5 lakh) and Tarun (Rs 500,001–Rs 10 lakh).

The names Shishu, Kishore and Tarun also signify the stage of the beneficiary micro unit’s growth or development and its funding needs. Any individual who is otherwise eligible to take a loan and has a business plan for a small business enterprise can avail of credit under the scheme.

Since its launch, the scheme has undergone numerous changes. Its target area, for example, has been widened to maximize its positive economic impact. Initially, the PMMY covered income-generating activity only in the sectors of manufacturing, trading and services.

However, since 2016-17, activities allied with agriculture and their support services promoting livelihoods have been brought under its ambit; since 2017-18, loans have been sanctioned for the purchase of tractors and power tillers; and from 2018-19, loans to buy two wheelers for commercial purposes have also been included.

Total disbursement under the scheme showed an average 33% growth in its first three years, indicating that its unique selling proposition was well received. The outbreak of the Covid pandemic and subsequent slowdown in economic activity impacted the demand for these loans. During this phase, a special relief provision of the Reserve Bank of India (RBI) permitted all lending institutions to grant a moratorium of six months on the payment of all instalments under the scheme.

After the economy’s re-opening, loan demand under the PMMY has gathered pace. In most categories, disbursements have surpassed pre-Covid levels. Data as on 24 March 2023 puts the scheme’s cumulative disburse amount at Rs 22.65 trillion. The share of Shishu loans is the highest, at 40%, suggesting that the PMMY has largely supported first-time entrepreneurs.

The PMMY’s economic impact is now well established. As per survey results of the Ministry of Labour and Employment, the scheme had helped in generating 11.2 million net additional jobs during the period 2015 to 2018.

The social impact of the PMMY is a much deeper story and can be understood at three levels. These three levels include the scheme’s impact on (1) broad social groups; 2) women; and 3) members of minority communities.

In terms of the first, the PMMY has benefitted all segments of Indian society: General, Scheduled Caste/Tribe (SC/ST) groups and Other Backward Classes (OBCs). The increasing participation of OBCs and SCs in availing these loans in recent times is an indication of the scheme’s outreach.

One of the scheme’s most commendable achievements is its impetus to women’s entrepreneurship. In its cumulative data since inception, the share of accounts held by women is as high as 69%, while the share of women in the sanction list is 45%. Disbursements to women entrepreneurs registered an average growth of 23% in the scheme’s first four years. In 2022, it surpassed its pre-Covid level, registering a robust growth of 28%.

The PMMY also fares well on other measures of inclusivity. The scheme has been able to cater to the requirements of minorities. Loans to members of minority groups touched an all-time high in 2022, with their overall share at 10%, with Shishu and Kishore loans accounting for 85% of total cumulative disbursement.

Since the PMMY is a national scheme, its spatial dispersion is an important consideration from the point of view of balanced economic growth. One of the objectives of India’s growth policy has been to bridge the divide between the thriving western and lagging eastern parts of the country. A Herfindahl Concentration Index estimate of the number of accounts and disbursed amounts shows significant dispersion across States and products. This indicates an impressive geographical coverage.

States such as Uttar Pradesh, Odisha and Bihar have recorded all-round gains from the PMMY. West Bengal and Tripura have also seen a rise in their total share (and also in the Kishore and Tarun categories), indicating an eastward flow of beneficiaries. Developed regions such as the National Capital Region, Maharashtra, Karnataka and Goa have seen their shares decline, even though they dominate the scheme in absolute terms.

Overall, the PMMY has achieved its objectives of equitable and fair spatial distribution of benefits during its ninth year of operation by fostering self employment across social groups, doubling the participation rate of women over that observed in commercial-bank lending and boosting the participation of minority groups.

In the coming years, it is imperative that the PMMY reaps the benefits of 5G technology and e-commerce, even as Mudra cards are popularized further. Encouraging the registration and formalization of own-account enterprises could be another way of taking this scheme to new highs.

The celebrated anthropologist Oscar Lewis had once argued in his seminal work, The Children of Sanchez, that a “culture of poverty” tends to perpetuate itself over time, often transcending boundaries. The PMMY, in a short span, has not only attacked and altered the course of this culture of poverty, but infused a sense of vibrancy and can-do spirit in the Indian micro-credit ecosystem. The PMMY has clearly been an uncommon solution to ‘common problems’.


(These are the author’s personal views.)