How is Nirmala’s loan announcement superior to MUDRA?

Many were waiting with bated breath yesterday. After all, a 20 lakh programme announced by the PM sounded very promising.

FM Nirmala’s major announcement was the 3 lakh loan guarantee scheme. The major features of this scheme include

  • 4 year loans
  • 12 months principal repayment moratorium
  • Capped Interest Rates
  • No Guarantee Fee
  • No Collateral

What are the main features of MUDRA scheme?

  • 3-5 year loans
  • No Collateral
  • Applicant must submit a business plan
  • Applicant must not have defaulted on loans before

So the biggest difference between the two schemes are 12 months principal repayment moratorium and capped interest rates.

So if someone takes a loan of 10 lakhs under the new scheme, in the first 12 months, they will save approximately 3 lakh of cash flows. However, from the second year onwards they will be paying a higher EMI, Rs 4 lakhs per annum to the bank. These are approximate numbers, please check with your bank

It is a good scheme because it creates two levels of cash flow. One, upfront you have more cash to pay for inventory, rentals, salaries and even marketing costs. Second, you don’t have to return the money for one year. In the MUDRA system, one would have returned Rs 3 lakhs in the first year itself, but in this case, that much extra money is there with the business person for a whole year.

The main challenge with this scheme as it is for most loan schemes is the loan amount. To understand this point, one must realise that there are 3 kinds of MSMEs – Micros, Small and Medium. Micro SMEs make up for 99% of MSMEs (Old definition). Given their size, they are likely to get very small loans if MUDRA is any indication. But the fact is that Micro SMEs will NEED bigger loans because they may not have large cash reserves like the bigger companies. The Govt will easily meet the 100% loan target but if Micro SMEs don’t gain from the scheme, it really won’t help the Indian economy .

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