The Indian Government has recently approved a 2% interest subsidy scheme for Shishu loan account holders under the Pradhan Mantri Mudra Yojana (PMMY). This scheme aims to support small businesses that have faced challenges due to the lockdown imposed following the Covid-19 outbreak.
The Pradhan Mantri Mudra Yojana (PMMY)
PMMY was introduced by the government in 2015 with the primary purpose of providing loans up to Rs. 10 lakh to small/micro-enterprises that are non-corporate and non-farm based. Micro Units Development & Refinance Agency Ltd. (MUDRA), a financial institution established by the Government, oversees the distribution of these funds via various last-mile financial institutions like Banks, Non-Banking Financial Companies (NBFCs), and Micro Finance Institutions (MFIs).
The PMMY operates through three products named ‘Shishu’, ‘Kishore’, and ‘Tarun’. These are designed according to the growth stage and funding requirements of the beneficiary micro units. The Shishu tier covers loans up to Rs. 50,000, Kishore caters to loans above Rs. 50,000 and up to Rs. 5 lakh, and Tarun encompasses loans above Rs. 5 lakh and up to Rs. 10 lakh. All these loans are collateral-free.
Atmanirbhar Abhiyan and the 2% Interest Subsidy Scheme
This 2% Interest Subsidy Scheme aligns with measures announced concerning Micro, Small and Medium Enterprises (MSMEs) under the Atmanirbhar Bharat Abhiyan. Loans outstanding as on 31st March 2020 and not classified as Non-Performing Asset (NPA) category as per the Reserve Bank of India (RBI) guidelines on 31st March 2020 and during the scheme’s operation will be eligible for this scheme.
The subsidy will apply to all months in which the loan accounts maintain their non-NPA status, incentivizing regular repayments. If an account that turned NPA becomes a performing asset, it will again qualify for the subsidy.
Implementation of the Scheme
This Scheme will be implemented through the Small Industries Development Bank of India (SIDBI) for 12 months. SIDBI was established on 2nd April 1990 under an Act of Parliament, tasked with promotion, financing, and development of the Micro, Small and Medium Enterprise (MSME) sector.
For borrowers granted a moratorium by their respective lenders, as permitted by RBI under the ‘Covid-19 Regulatory Package’, this Scheme will begin after the moratorium period ends, up to 12 months i.e., from 1st September 2020 till 31st August 2021. For other borrowers, the scheme starts from 1st June 2020 until 31st May 2021.
Cost to the Government
The estimated cost of this Scheme is approximately Rs. 1,542 crore.
The Need for the Scheme
Due to the Covid-19 crisis and subsequent lockdown, micro and small enterprises funded through Shishu Mudra loans have experienced significant business disruptions. These businesses operate on slim margins and the lockdown has negatively impacted their cash flows, potentially causing defaults in loan repayment. As of 31st March 2020, about 9.37 crore loan accounts under the Shishu category of PMMY with a total loan amount of about Rs 1.62 Lakh crore were outstanding.
Way Forward
This Scheme should provide relief to the MSME sector, enabling small businesses to continue functioning without laying off employees due to lack of funds. It is expected to have a positive impact on the economy and support its recovery, which is essential for future employment generation.
Source: PIB
