Interest Subvention on Repayment of Shishu Loans under PMMY

Ashish M. Shaji

10 Sep, 2022

The union cabinet chaired by the Indian Prime Minister Narendra Modi approved a scheme allowing 2% interest subvention for a period of 12 months to all Shishu loan accounts under the Pradhan Mantri Mudra Yojna (PMMY) to all eligible borrowers.

What is the criterion for qualifying for this scheme (Interest Subvention)?

The Interest Subvention scheme will be provided to loans that are outstanding as on 31^st March 2020 and not in the NPA (Non-Performing Assets) category according to the guidelines of the Reserve Bank of India (RBI) on 31^st March 2020 and during the operation of the scheme. 

 The interest subvention shall be payable for the months in which the accounts are not in the NPA (Non-Performing Assets) category, including for the months that the accounts become a performing asset again after turning NPA. The scheme is expected to incentivize people who will make regular repayments of loans.

Background/Context of this scheme

The scheme is for implementing one of the measures related to Micro, Small and Medium Enterprises (MSMEs) announced under the Atma Nirbhar Bharat Abhiyan. Under the Pradhan Mantri Mudra Yojna (PMMY), loans for income-generating activities up to 50000 rupees are known as Shishu loans.

PMMY loans are provided by Member lending institutions that include Scheduled commercial banks, Non-Banking Finance Companies (NBFCs), and MFIs (Micro Financial Institutions) registered with Mudra Limited. 

The estimated cost of this scheme shall be approximately 1542 crore rupees, which shall be provided by the Government of India.

What was the need for this scheme?

As we all know that the crisis caused by the Covid-19 pandemic has been unprecedented, and the ensuing lockdown has further added to the woes. It has caused severe disruption of businesses, especially for micro and small enterprises, which are funded by Shishu Mudra loans.

Small businesses usually operate on thin operating margins, and the present lockdown situation severely impacted their cash flows, thereby jeopardizing their ability to service their loans. This can cause a default in repayment and have a resultant impact on accessing the institutional credit in the future.

Another concerning data state that about 9.37 crore loan accounts under the Shishu category of PMMY with a total loan amount of around 1.62 lakh crore rupees were outstanding. Keeping these things in mind, the decision was made to help the MSMEs tide over the difficulties caused by the lockdown following the outbreak of Covid-19.

Our recommendation: What are the measures taken for MSMEs amidst Covid-19 Pandemic?

Strategy of Implementation

The scheme will be implemented through the SIDBI (Small Industries Development Bank of India), and it will be in operation for a period of 12 months.

Logically speaking, the relief can only be provided in case of payment being made. Therefore in case, the repayment is not made by the MSMEs, there shall be no subvention. The MSMEs who are already enjoying the benefit of moratorium by their lenders will not be eligible to avail of the benefits of the interest subvention. However, it may be noted that once the period of moratorium expires, the MSME can avail of the benefit of interest subvention as well.    

For those borrowers who have been allowed a moratorium by their respective lenders, as allowed by the Reserve Bank of India under the Covid-19 regulatory package by the RBI, the scheme shall start post completion of the moratorium period till a 12 month period that means from 1^st September 2020 till 31^st August 2021. In case of other borrowers, the scheme shall start with effect from 1^st June 2020 till 31^st May 2021. 

What could be the impact of the scheme?

The scheme has been prepared as a specific response to the unprecedented situation and seeks to mitigate financial stress for borrowers at the bottom of the pyramid by minimizing their cost of credit. The scheme is aimed to provide much-needed relief to the sector hence allowing the small businesses to continue operating without laying off employees due to the lack of funds.   

The scheme is also foreseen to have a positive impact on the economy and support its revival by helping small businesses to continue their operations during these crisis situations. It is also critical considering the employment generation in the future.

Overview on Pradhan Mantri Mudra Yojna

Pradhan Mantri Mudra Yojna is a scheme of the Indian Government to fund the unfunded by bringing those enterprises to the formal financial system and providing affordable credit to them. It was launched on 8^th April 2015, by the Prime Minister Narendra Modi.  

The primary aim of this PMMY scheme is to refinance collateral-free loans given by the lenders to the small borrowers. Banks and Microfinance institutions can draw refinance under the MUDRA scheme after becoming a member lending institution of MUDRA. Mudra loans can be utilized for non-agricultural activities for up to 10 lakh rupees, and activities allied to agriculture like dairy, poultry, beekeeping, etc. are also covered.

Borrowers who desire to avail of this scheme can approach the local branch of any of the financial institutions like Microfinance institutions, Non-Banking Financial Companies, etc. sanction of the assistance will be according to the eligibility norms of the respective lending institutions. It may be noted that for all PMMY loans, no processing fee is charged, no collateral is required, and the applicant must not be a defaulter of any bank or a financial institution.

Conclusion

Also, read: What are some of the policy measures to uplift MSME sectors?