The government of India has several financing schemes for small businesses. In this article we will look at one such scheme called the ‘Shishu Loan’
Introduction
Opening up an economy to the global free markets is just the first step in an economy’s journey to realising its full growth potential. Foreign trade alone cannot be the sole measure of economic growth. It creates dependencies that can create an undue influence on the economy and challenge its independence.
In order for an economy to be firm and resolute, it needs a strong foundation and deep roots. And this comes from a stable and self-sufficient domestic economy that is consistently able to deliver a high output in terms of the gross domestic product (GDP). And the number one requirement for domestic industries to grow is monetary funding.
Many governments across the world have now begun to actively promote indigenous start-ups whose goals align with the infrastructural needs of the country.
They provide low cost funding to these start-ups in the form of loans or investment.
The Indian government has actively been promoting the indigenous start-up culture under the ‘Make in India’ initiative, launching several schemes for various start-ups in various stages of incubation and growth. In this article, we are going to specifically look into the ‘Shishu’ loan scheme and its features.
Types Of Loans
‘Shishu’ literally meaning ‘Infant’ refers to businesses in the most nascent stages of their growth potential, having very basic funding requirements. The Shishu loan is one part of a larger scheme called the Pradhan Mantri Mudra Yojana (PMMY).
The Pradhan Mantri Mudra Yojana was launched in 2015 offering three classes of loans. These signify varied stages of growth, development, and funding needs of the type of unit that is availing the loan. These categories are
- The Shishu loans cover loan requirements of up to ₹50,000.
- The Kishore loans cover loan requirements above ₹50,000 and up to ₹5 lakh.
- The Tarun loans cover loan requirements between ₹5 lakhs and up to ₹10 lakhs.
How Is A Shishu Loan Available?
The MUDRA Ltd (Micro-Unit Development and Refinance Agency) is a government entity that has been incorporated primarily with the objective of providing micro-entrepreneurs with loan requirements of up to ₹10,00,000.
Moreover, lending institutions such as commercial banks, non-banking financial institutions, public sector as well as private banks registered with the Mudra agency are eligible to extend Shishu loans on its behalf. A company intending to take a loan up to ₹50,000 can avail of this priority sector lending scheme in a commercial bank of their choice as long as they are registered with MUDRA.
Features Of Shishu Loan Cover
- Objective – The Shishu loan is basically a type of facility for providing working capital or a term loan to businesses with regards to their day to day operations. Its purpose can be for meeting regular orders, meeting credit needs, capacity expansion, modernization, etc.
- Eligibility – The loans belonging to the Shishu category can be availed by all business enterprises belonging to the manufacturing, trading or service sectors including agriculture activities. This loan can be availed by business owners, shopkeepers, start-up entrepreneurs, etc.
- Requirements – For taking a Shishu loan from a scheduled commercial bank, the best advantage is that there are no processing charges, no security or collateral required, and no minimum loan amount requirement.
- Accessibility – MUDRA issues something called a MUDRA card to applicants of the Shishu loan which works as an ATM card with access to the Rupay platform and POS machines.
- Repayment tenure – The loans need to be repaid in a maximum of five years.
How To Apply For A Mudra Loan?
Any beneficiary, whether sole proprietor, partnership, or company can avail Shishu loan. This can be done by downloading the appropriate form from the tab “Application Form for Shishu” on the official MUDRA website. This application form needs to be approved by the bank or financial institutions willing to extend a loan to your business. Although not necessary, it is advisable to avail a loan from a branch familiar to you.
It would be additionally advisable to avail the loan from a branch where the business has active banking operations so the processing of funds is easier even for the bank.
Interest Subvention Of Shishu Loans
In light of the data emerging with regards to business losses caused by the coronavirus pandemic, the government of India launched a beneficial interest subvention scheme for small loans.
Micro and small companies that had availed small loans prior to the pandemic were finding it difficult to make repayments. The government had realised that due to severe losses to businesses, financial stresses at the bottom of the industrial chain were accumulating. These were pushing many small businesses to the brink of closure.
The Union Cabinet approved an interest subvention (reduction in the rate of interest) by 2% for a period of 12 months to all Shishu loan accounts. It is to be noted that the approval of the scheme would entail a cost of ₹1542 crores to the exchequer.
This scheme of interest subvention was introduced mainly to enable the smallest of businesses in continuing their operations, in times of cash crunch. Additionally, this would help small businesses in meeting their interest obligations and also help them retain employees.
Eligibility For Interest Subvention
The scheme will extend only to businesses that did not fall under the category of Non-Performing businesses as defined under the guidelines of Reserve Bank of India.
Moreover, the interest subvention is payable for months in which the accounts are operational and not non-performing. This is to encourage only regular payment makers.
Operational Details Of The Scheme
The scheme was operated by the Small Industries Development Bank Of India (SIDBI) for a period of 12 months. This period lasted between 1 June 2020 until 2021.
For those borrowers who have already availed a moratorium on payment by the bank or financial institution, the scheme would still be available to them post completion of the moratorium period. Hence, it would not make moratorium holders eligible for the benefit.
Defaulters on loans cannot avail of the benefit of interest reduction.
Conclusion:-
There are several schemes that can greatly benefit small companies, that allow the younger generation to take non-conventional paths to financing which might actually be cheaper to avail.
But to avail these schemes, you have to go through a lot of paperwork, especially because a lot of these schemes are welfare schemes that come without requiring collaterals or charges.
And this paperwork can get rather technical and confusing without the right guidance and support. So it is always advisable to seek the counsel of a trained professional who is aware of the technicalities of finance and is familiar with the paperwork required for government schemes.
So if you are looking for such legal guidance or help, feel free to get in touch with us and we will ensure that you receive the right kind of assistance for your requirements.
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