MSME & Government Schemes · Part 3 · MSME · 13 min read · September 2026

Mudra loan, start to finish: ₹20 lakh, no collateral, no subsidy — and the file the bank actually reads

Almost every Mudra applicant who reaches a branch is carrying one of three ideas. That MUDRA is a government office that gives the loan. That some part of it is a subsidy. And that because the scheme says "no collateral", the bank has nothing left to check. All three are wrong, and each one costs people time, money or the loan itself. This is the whole scheme — the four loan sizes, who qualifies, the papers, the portals, and what happens on the lending side of the desk — in the order you will meet it.

What Mudra actually is

The Pradhan Mantri Mudra Yojana was launched on 8 April 2015 to bring small businesses — the tailor, the tea stall, the mobile repair shop, the small workshop — into formal bank credit. The name comes from MUDRA, the Micro Units Development and Refinance Agency, a subsidiary of SIDBI.

Read the last word of that name again: refinance. MUDRA does not lend to you. It supports the lenders — commercial banks, regional rural banks, small finance banks, co-operative banks, NBFCs and microfinance institutions — who do. When you take a "Mudra loan", you are taking a loan from one of those lenders, under their own appraisal and their own interest rate, in a category the scheme defines. That is why there is no Mudra office to visit and nobody who can "release" a Mudra loan to you for a fee.

The government's real contribution is a guarantee. Eligible Mudra loans are covered by the Credit Guarantee Fund for Micro Units, run by a government trustee company. If a covered loan goes bad, the fund pays the lender a part of the loss. That cover is what lets a bank lend to a small business without asking for property. It protects the bank, not the borrower — a point that matters later.

The four sizes

The category is simply a label for the loan amount. It also signals the stage the scheme expects the business to be at.

Tarun Plus was added after the July 2024 Union Budget raised the scheme's ceiling from ₹10 lakh to ₹20 lakh, and the guarantee cover was extended to match. The condition attached to it is strict: it is a reward for a repaid Tarun loan, not a fourth door open to everyone.

You also do not have to climb the ladder from the bottom. A business that genuinely needs ₹3 lakh and can show it applies for Kishore directly. What you cannot do is ask for more than the activity justifies because the category allows it.

Who can apply

• Non-corporate, non-farm small businesses in manufacturing, trading or services — proprietors, partnership firms and other small entities as well as individuals.
• Activities allied to agriculture are included — dairy, poultry, fishery, beekeeping, food and agro-processing. Crop loans and land improvement are not. Those go to the Kisan Credit Card and other farm loans.
• The money must earn income. A Mudra loan cannot pay for a wedding, a family car or an old personal debt. A vehicle used in the business, like a goods carrier or an e-rickshaw, is a business purpose.
• No default on your record with any bank or financial institution.
• Age is set by the lender. Most use a band of roughly 18 to 65 at the time of application.

There is no income ceiling, no caste condition and no education requirement in the scheme itself. Women, SC/ST and OBC borrowers make up a large share of Mudra accounts, and some lenders offer them a small concession on the rate, but the loan is open to every eligible business.

What it costs

Interest. The government does not fix a Mudra rate. Each lender prices the loan like its other small business loans — usually its benchmark rate plus a spread that reflects your risk. A public sector bank and a microfinance lender can quote very different figures for the same amount, so compare.

Processing fee. Most lenders waive it on Shishu loans. Above that it depends on the lender's policy, often charged per lakh of loan.

Guarantee fee. The guarantee fund charges the lender a yearly fee. Some lenders absorb it; some recover it from the borrower. Ask which — it is a small amount, but it recurs every year.

Margin. For very small loans lenders often ask for nothing. For larger ones they commonly expect you to fund a slice of the cost yourself. The percentage is the lender's rule, not the scheme's.

All of this should appear in the Key Fact Statement the lender gives you before you sign. RBI requires one for small business term loans too, not just personal loans. If a charge you were told about is missing from it, ask before you sign, not after.

That last line is the only question the appraisal is really asking. Every document you submit is evidence for or against it.

The Mudra Card, and why it can save interest

Mudra loans come in two shapes. A term loan buys something that lasts — a machine, a vehicle, shop fittings — and is repaid in fixed instalments. A working capital limit pays for stock and running costs, and is usually given as a cash credit or overdraft that is renewed each year.

For the working capital part, the lender can issue a Mudra Card, a RuPay debit card linked to that limit. You draw from it at an ATM or pay suppliers at a card machine, and you put money back whenever sales come in. Interest is charged only on what you have actually used, for the days you used it.

There is a second reason to do this. A limit that sits fully drawn for months, with no sales passing through it, is the first thing a branch notices at renewal. An account that moves every day is the best evidence your business is real.

Mudra or PMEGP?

They are often confused, and they solve different problems.

If you are starting a new unit that buys machinery and you can wait for a longer process, PMEGP's subsidy is worth real money. If your business is already running, needs stock or a modest machine, or needs the money sooner, Mudra is usually the right door. A unit that started on Mudra and ran well can later apply for PMEGP's upgradation loan.

Documents to keep ready

Lenders differ a little, and Shishu files need far less than Tarun files. This is the set that comes up most often.

• Aadhaar, PAN and a recent photograph of the applicant (and of partners, for a firm)All categories
• Proof of residence and proof of the business addressAll categories
• Proof the business exists — Udyam Registration, a shop licence, GST registration or trade licence, whichever appliesAll categories
• Quotations for the machinery, equipment or vehicle to be bought, with the supplier's detailsAll categories
• SC, ST, OBC or minority certificateIf claiming a concession
• Last six to twelve months' bank statement of the business or proprietorKishore and above
• Last two years' income tax returns and balance sheetsTarun and above, for running units
• Projected sales and profit for the next one to two years, and sales achieved so far this yearKishore and above
• Partnership deed or other constitution documentsFor firms and entities
• Repayment record of the earlier Tarun loanTarun Plus only

Udyam Registration is free and takes minutes on the government portal. If you do not have it, get it before you apply — most lenders will ask, and it is easier to show than to explain.

The procedure, step by step

1. Fix the amount and the purpose

   Write down exactly what the money buys — which machine, how much stock — and what it costs. The total decides your category. Split it into what must be a term loan and what is working capital.

2. Check your credit report first

   The lender will pull it before it reads anything else. An old overdue credit card or a settled loan you had forgotten can end the file. Check it yourself and get any wrong entry corrected before you apply.

3. Get your business papers in order

   Udyam Registration, the business address proof, quotations, and — for Kishore and above — a simple project note showing sales, costs and how the instalment will be paid.

4. Apply — at a branch or online

   Walk into a branch near your business, or apply online on the government's jansamarth.in portal, which checks eligibility and routes the application to lenders; the older udyamimitra.in portal also takes Mudra applications. There is no application fee on either.

5. Appraisal

   The branch pulls your credit report, may visit the business, checks the quotations and reads your bank statement. For bigger loans it will test whether your cash flow can carry the instalment.

6. Sanction and signing

   You receive a sanction letter and a Key Fact Statement. Read the rate, the fees, the tenure, the margin and the security. You sign the loan documents, and the bank records a charge — hypothecation — on the assets the loan pays for.

7. Disbursement

   A term loan is normally paid straight to the supplier against the quotation. A working capital limit is opened as a cash credit or overdraft, often with a Mudra Card.

8. Repay, renew, grow

   Pay instalments on time, keep sales flowing through the account, and renew the working capital limit each year. A clean Tarun loan, fully repaid, is what opens Tarun Plus.

Why Mudra files get turned down

Being eligible for the scheme is not the same as being approved for the loan. These are the reasons that come up most often, and nearly all of them can be fixed before you apply.

The credit report. An overdue account, a written-off card, a "settled" loan, or too many recent loan enquiries. The guarantee does not make a lender ignore repayment history.

A business nobody can see. No address proof, no registration, a bank account with no business entries. For a small business, the bank statement is the income certificate.

An amount that does not match the activity. Asking for ₹8 lakh for a tea stall. The category ceiling is a limit, not an entitlement.

A personal purpose in business clothes. Loans meant to clear old debts, pay for a family event or buy a personal vehicle get caught at appraisal.

Instalments already stretched. If existing EMIs already swallow most of what the business earns, a new one cannot fit.

A branch far from the business. The branch has to be able to visit and monitor. Apply near where you work.

Five beliefs worth dropping

"Mudra has a subsidy." It does not. A short-lived 2% interest relief on prompt-paid Shishu loans was announced in 2020 as a pandemic measure for twelve months. It was not a permanent feature, and there is no subsidy in the scheme today.

"An agent or a Mudra office can get it approved." MUDRA does not lend to individuals, applying is free, and the decision belongs to the lender alone. Anyone asking for a "file charge" to get a Mudra loan passed is selling you nothing — and letters promising "Mudra loan approved" in exchange for a fee are a known fraud.

"No collateral means no checks." The guarantee replaces property, not appraisal. The lender still reads your credit report and your business, and still takes a charge on what the loan buys.

"The government will waive it." There is no Mudra waiver. If the loan defaults, the guarantee pays the lender part of its loss — it does not cancel your debt. The default goes on your credit report like any other and follows you to every future loan.

"If I qualify, the bank has to give it." The scheme defines who may be financed. It does not oblige any lender to finance you. A clear project, a clean report and a visible business are what turn eligibility into a sanction.

The one-line summary

Mudra is a normal business loan made easier to get — no property, no subsidy, and no shortcut past the appraisal. Ask for what the business can justify, clean your credit report first, keep your sales moving through the account, read the Key Fact Statement before you sign, and repay a Tarun loan well if you ever want the ₹20 lakh that sits above it.

Written at the MoneyClarityTech desk — by a working retail-credit professional in Indian banking who reads loan files, credit reports and bank statements every working day. Patterns from hundreds of real cases; every identifying detail removed. More about MoneyClarityTech →