The Pradhan Mantri Mudra Yojana (PMMY) is a large-scale policy intervention designed to address the well-established credit gap for micro and small enterprises in India. The Economic Census 2013-14 reported only 2% of all enterprises with institutional loans as a major source of finance and a further 0.53% with SHG loans as their major source. It is important to note here that these low estimates have persisted despite several initiatives to fund MSMEs. The most notable among these initiatives was the inclusion of MSMEs under priority sector lending norms from 1972. This, along with the creation of credit guarantee facility (CGTMSE) by the Small Industries Development Bank of India (SIDBI), launched in 2000, were initiatives aimed at lenders in a bid to expand the supply of credit to under-served enterprise segments. The PMMY was introduced in 2015 to direct consolidated efforts designed to address and relieve supply-side constraints.
In August 2016, Dvara Research was appointed by the Ministry of Finance to review the status of implementation of the scheme and provide an early stage assessment. Three main features anchor the scheme, viz. the enrolment and direct supervision of Member Lending Institutions (MLIs), the availability of MUDRA refinance and the provision of a specialised Credit Guarantee Fund for Micro-Units (CGFMU).
We began our analysis by constructing a theory of change framework to understand the different scheme components, objectives and expected outcomes. The report also proposes an analytical framework for monitoring of intermediate effects and measurement of long-term outcomes. The report studies in detail:
- The range of financial products available to MSMEs as well as the characteristics of MSME borrowers, end uses of loan funds, and their overall customer experiences
- The institutional or regional disparity in the impact
- Primary processes in loan decision making and the frontline interaction between lenders and borrowers
Our research highlighted that the effective implementation of the scheme was heavily dependent on the characteristics of the lender. For example, the performance incentives vary significantly between member lending institutions. In general, SCB and RRB branches are assigned overall credit volume targets (for all MSME credit and not specific to PMMY), and the origination process is almost self-contained within each branch incentivising loan officers to make “easier” larger-ticket loans to “safe” borrowers. On the other hand, loan officers of MFIs are incentivised on the basis of new group formations and new clients. The cascading effect of incentives is more pronounced in encouraging more group loans where underwriting criteria are also simpler and loan sanction is quicker.
At an aggregate level, we also find that there is significant variation in the disbursement of PMMY credit at both state and district levels. For instance, our analysis revealed that the concentration of PMMY loans was the highest in districts with a larger share of profitable enterprise activity. The number of Mudra loans sanctioned in the top 10 districts is roughly the same as the number of loans received by 355 other districts in the same year.
This study is an early-stage assessment of PMMY and does not set out to evaluate the impact of the scheme. Instead, our focus in this report is to study the design and implementation of PMMY and to generate insights on early performance trends. The report concludes with a range of recommendations about aspects of loan origination, portfolio risk management and overall performance monitoring. One major recommendation is on the recalibration of the refinance and credit guarantee schemes offered under the PMMY to member lending institutions. The design of the scheme should provide more attractive and suitable terms for non-bank finance companies. The objectives of the scheme would be achieved more efficiently by enlisting more specialist lenders into PMMY. This would help overcome the effects of market fragmentation and encourage innovative partnerships between large banks and small specialist lenders.
The full report of our findings is accessible here.