Central government has approved 2% Interest Subsidy Scheme for Shishu Loan Account Holders under the Mudra Yojana. This interest subvention will help small businesses to cope up with the difficulties due to Coronavirus (COVID-19) lockdown. Under Shishu category of PM Mudra Loan Yojana, the lenders provide collateral-free (without guarantee) loans of upto Rs. 50,000.
The 2% Interest Subsidy Scheme is estimated to cost Rs. 1,542 crore to the central govt. exchequer. The decision to provide interest subvention of 2% for a period of 12 months to all Shishu loan accounts under Pradhan Mantri Mudra Yojana was taken in the Cabinet Committee on Economic Affairs (CCEA) meeting chaired by PM Narendra Modi on 24 June 2020.
At the end of March 2020, around 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.
2% Interest Subsidy on Shishu Mudra Loans
The new 2% interest subsidy scheme will be extended to all Shishu loans that are outstanding as on 31 March 2020 and are not in Non-Performing Asset (NPA) category. The interest subvention would be payable for the months in which the accounts are not in NPA category. It includes the months in which loan account becomes a performing asset again, after turning NPA. The new move will incentivize people who are Shishu Loan Account Holders and will make regular repayments of loans under Pradhan Mantri Mudra Yojana.
Shishu Mudra Loan Interest Subvention Scheme
The Shishu Mudra Loan Interest Subsidy Scheme is for implementation of one of the measures relating to MSMEs as announced under the Atmanirbhar Bharat Abhiyan. The PM Mudra Loan Scheme was launched by PM Narendra Modi on 8 April 2015. In this scheme, the central govt. provide loans upto Rs. 50,000 under Shishu Category, Rs. 50,000 to Rs. 5 lakh under Kishor Category and Rs. 5 lakh to Rs. 10 lakh under Tarun Category. The non-corporate, non-farm small/micro enterprises can avail these loans.
These loans are classified as MUDRA loans under PMMY. These loans are given by commercial banks, RRBs, small finance banks, MFIs and NBFCs. The Interest Subsidy Scheme Scheme will be implemented through the Small Industries Development Bank of India (SIDBI) and will be in operation for 12 months.
Timelines for Shishu Mudra Loan Interest Subvention
The timelines for Shishu Mudra Loan Interest Subvention Scheme are specified here:-
A) For borrowers who have been allowed a moratorium, as permitted by RBI under the “COVID 19 Regulatory Package”, the scheme would commence post completion of the moratorium period till a period of 12 months. It means that Shishu Mudra Loan Interest Subvention Scheme for small borrowers who are covered under moratorium will be effective from 1 September 2020 till 31 August 2021).
B) For other small borrowers who are not under moratorium, the Interest Subsidy Scheme under Shishu category of Mudra Loans would commence with effect from 1 June 2020 till 31 May 2021.
Impact of Interest Subsidy on Shishu Mudra Loan Borrowers
The central government mentioned that Interest Subsidy Scheme for Shishu Loan Account Holders under Mudra Yojana will be formulated as a specific response to COVID-19 crisis. It will enable people to tackle an unprecedented situation and aims to alleviate financial stress for borrowers at the “bottom of the pyramid” by reducing their cost of credit. The interest subvention on Shishu Loans under Mudra Yojana is expected to provide much needed relief to the sector.
It would enable small businesses to continue functioning without expelling employees due to lack of funds. This Shishu Mudra loan interest subsidy scheme will have a positive impact on the economy and support its revival which is necessary for employment generation in future. The ongoing Coronavirus crisis and subsequent lockdown has led to severe disruption of business for micro and small enterprises which are funded through Shishu Mudra loans.
Small businesses typically function on thin operating margins and the current lockdown has had a severe impact on their cash flows, jeopardizing their ability to service their loans. This could lead to default in repayment and have a resultant impact on access to institutional credit in future.