MUDRA loan: borrowing up to INR 20 lakh without pledging property

02Who qualifies for a MUDRA loan, and who does not?

The scheme sets five conditions, and the lender adds its own norms.

• You are an Indian citizen borrowing as an individual, or a business in another legal form. MUDRA names proprietorships, partnership firms and companies. Its guarantee fund also covers loans to self-help groups and joint liability groups.
• Your business is a micro or small enterprise. A medium enterprise falls outside the scheme.
• It earns income from manufacturing, processing, trading, services or an activity allied to agriculture, such as dairy, poultry, fisheries, beekeeping or food processing.
• You need no more than INR 20 lakh in all, and anything above INR 10 lakh only after repaying a Tarun loan.
• You are not in default to any bank or financial institution, and your credit record is satisfactory.

Vehicles, tractors, power tillers and two-wheelers qualify only for commercial use. Crop loans are out, as is land improvement such as canals, irrigation and wells. So is borrowing for consumption or personal needs. MUDRA's own scheme note adds that a lender may expect an individual to have the skills or experience the activity calls for.

Founders running a private limited company should know that the official texts disagree. MUDRA's FAQ and its scheme note both list private limited companies as eligible applicants. Yet the same FAQ and MUDRA's home page describe the scheme's market as non-corporate businesses, as do the MUDRA pages of SBI and Indian Overseas Bank. Ask your lender whether it lends to companies under MUDRA before you build the file.

The scheme papers do not ask for DPIIT recognition or Udyam registration, and the guarantee fund behind the loans says MSME registration is not needed for its cover. A lender may still ask for Udyam registration under its own policy.

04What interest rate does a MUDRA loan carry?

The scheme sets no rate. Interest on MUDRA loans is deregulated, so each lender prices them within RBI guidelines, and banks have been told to keep the rate reasonable. A lender that draws MUDRA refinance must also stay inside interest caps that MUDRA's site attributes to RBI.

So a rate quoted to you as the MUDRA rate is one lender's rate. SBI, for one, links its MUDRA pricing to its external benchmark lending rate. Two banks can quote different prices for the same loan, and both can be within the scheme.

So a rate quoted to you as the MUDRA rate is one lender's rate.

Compare offers on their whole cost. Ask each lender for its processing fee, the margin you must bring and whether it will pass on the guarantee fee. SBI's published terms are one example: no processing fee on Shishu and Kishor loans to micro and small units, and 0.50% plus tax on Tarun. SBI asks no margin up to INR 50,000 and 20% above that.

Women founders should ask for better terms. Women held 59.81% of PMMY loan accounts in FY 2024-25, PIB reports. MUDRA's site says lenders may consider extra facilities for women entrepreneurs, a lower interest rate among them. Each lender decides, so get any concession in writing.

06What the guarantee behind your loan costs, and whom it protects

Banks are mandated not to take collateral on loans up to INR 20 lakh to micro and small enterprises. The assets you buy with the loan become the lender's security instead.

Lenders accept that because of the Credit Guarantee Fund for Micro Units (CGFMU), a government trust fund run by NCGTC. On loans sanctioned from FY 2020-21, the lender absorbs the first 3% of the amount in default. The fund pays 75% of the rest, and its total payouts are capped at 15% of the lender's guaranteed portfolio.

That cover pays the lender, never you, and you stay liable for the whole loan. The lender also decides whether to use it at all. Indian Overseas Bank, for one, puts manufacturing and services loans under the CGTMSE guarantee and keeps CGFMU for retail trade.

The cover carries a fee of 1% a year, charged on the sanctioned amount in the first year and on the outstanding balance after that. Working capital limits keep paying on the sanctioned amount. A risk-based fee can sit on top, and the lender may recover the fee from you.

As an illustration, if the lender covers an INR 8 lakh Tarun term loan, the first-year fee at 1% is INR 8,000 before any risk-based fee. If the lender passes it on, add it to the interest cost when you compare offers.

08How Tarun Plus works for a repeat borrower

Tarun Plus was announced in the Union Budget on 23 July 2024 and took effect on 24 October 2024. It lends above INR 10 lakh and up to INR 20 lakh. Only an entrepreneur who took a Tarun loan and repaid it can use it, so a first-time borrower needing INR 15 lakh cannot start here.

The guarantee fund's FAQ answers the questions repeat borrowers ask. A Tarun term loan must be repaid and closed first. A Tarun working capital limit in good standing can be raised into Tarun Plus at renewal. Closing a Tarun loan early, from your own funds or other sources, also counts if your repayment record is satisfactory.

A loan taken as Tarun stays classified as Tarun even after its balance falls into a smaller band. What you owe on MUDRA loans at any one time, across every lender, must stay within the scheme limit.

10When a MUDRA loan fits, and when another scheme fits better

A MUDRA loan suits a micro or small business with a clear source of income and a modest need, such as stock, a machine, a commercial vehicle or working capital. It suits founders with no property to pledge.

It fits badly if you need more than INR 10 lakh on a first loan, if revenue is far off, or if the money is for crops or land.

For bigger amounts, look past MUDRA. Stand-Up India lent SC, ST and women founders of new ventures from INR 10 lakh, where MUDRA's first-loan ceiling ends, up to INR 1 crore. The Department of Financial Services gives its scheme period as up to 31 March 2025, so read that guide before planning around it.

A micro or small enterprise borrowing more can ask its bank about CGTMSE, which guarantees credit of up to INR 10 crore. For plant and machinery, read our guide to SIDBI's SMILE loan. A DPIIT-recognised startup can look at CGSS, which guarantees up to INR 20 crore.

Still choosing between instruments? Our scheme chooser runs the questions that usually settle it. If you want your loan file checked before you meet a bank, our debt and blended capital work starts with that review.