Massive Scale of Lending for Small Businesses

Union Finance Minister Nirmala Sitharaman recently announced that the Pradhan Mantri MUDRA Yojana (PM-MUDRA) has now sanctioned ₹39.48 lakh crore. This makes PM-MUDRA one of India's largest lending programs, aiming to give credit to people who don't have collateral, helping start businesses. From April 2022 to March 2025, over 18.37 crore loans totaling ₹15.50 lakh crore were given out. Significantly, 65% of these recent loans went to women entrepreneurs, and about 19% supported new entrepreneurs, showing the scheme's reach in financial inclusion.

High Outstanding Loans Hint at Future Risk

Despite strong lending numbers, looking closer at the scheme's status shows some concerns. As of March 31, 2025, the amount of loans that are still outstanding represented notable percentages of the total lent in each group: 12.4% in Shishu, 9.48% in Kishor, and 7.92% in Tarun. While the Shishu category, which supports the smallest business ventures, has a low official NPA rate of 1.83%, its higher overall outstanding percentage needs attention. The total NPA rate for PM-MUDRA is around 2-2.3%, which the Finance Minister called low. However, this is lower than the overall MSME sector's average NPA rate of 3.60% as of March 2025. Because PM-MUDRA loans are given without collateral, they naturally carry a higher risk than typical MSME loans.

Comparison with Other Lending and Economic Factors

Comparing PM-MUDRA's performance to other lending groups, like microfinance and MSME loans, shows mixed results. While the scheme's overall NPA of about 2-2.3% seems good, the microfinance sector, which often serves similar people, has faced major problems. As of March 2025, microfinance NPAs jumped to nearly ₹55,000 crore, or 14.8% of total loans, with a higher percentage of loans at risk. Some reports show gross NPAs in microfinance reaching 16% in FY25. Also, the MSME sector as a whole has seen more defaults on small loans, with new loans exceeding 16% at the end of FY24, due to borrowers taking on too much debt or growth plans not matching earnings. Loan defaults are affected by economic conditions and sector issues, which impact borrowers' ability to repay.

Potential Risks and Vulnerabilities

The large amount of outstanding loans, even if not yet officially bad loans, means a significant portion of debt could become problematic if the economy weakens. While the scheme has successfully reached many people, especially women and new entrepreneurs, these groups can be more sensitive to economic downturns. The higher rate of outstanding loans in PM-MUDRA compared to the total amount lent suggests potential difficulties in getting money back. Furthermore, the growing number of defaults on small loans across the financial system, particularly in smaller towns and rural areas, points to wider risks. The fact that PM-MUDRA loans don't require collateral makes them easier to get but also leaves banks without security, increasing their exposure. The need for credit among MSMEs remains high, estimated between ₹25-30 lakh crore, showing demand that the formal lending sector might struggle to meet without taking on more risk.

Managing Growth and Risk

Banks are working to recover outstanding loans through direct contact with borrowers and offering restructuring. The government has also taken steps to support the scheme, such as public awareness drives, easier application steps, and credit guarantee programs. As PM-MUDRA continues its large-scale lending, its future success will depend on balancing broad financial inclusion with managing the risk of increasing bad loans. This is particularly important given the sensitive nature of its target borrowers and the current uncertain economic climate.