How a flagship scheme meant to empower small entrepreneurs spiralled into a ₹4 lakh crore black hole of NPAs, fraud, and political manipulation.
The Micro Units Development and Refinance Agency (MUDRA) scheme was launched in 2015 with much fanfare. It was meant to be a panacea for India’s small entrepreneurs — the mom-and-pop stores, small-time traders, and street vendors. The scheme’s goal was simple: provide collateral-free loans to the underserved — loans that would help tiny businesses flourish and boost the economy from the grassroots level.
In principle, it was a good plan, albeit poorly designed, and eventually fell victim to the government’s eagerness for media coverage and the injection of party politics. It aligned well with the government’s goal of fostering financial inclusion, entrepreneurship, and employment generation. These loans were categorized into three types — Shishu (loans up to ₹50,000), Kishore (₹50,000 to ₹5 lakh), and Tarun (₹5 lakh to ₹10 lakh) — each offering different levels of financial assistance.
How has this scheme fared?
An SBI Research Report dated April 2, 2025 (link) claims that about ₹30 lakh crore has been disbursed to 52 crore loan accounts since the scheme’s inception a decade ago. However, these loans are causing headaches for banks, especially public sector banks (PSBs) and regional rural banks (RRBs), which have been disbursing a large chunk of them. By October 2024, most PSBs had disbursed only 42% of their MUDRA loan targets for FY25 — a huge shortfall, considering the government’s disbursement goal of ₹2.3 lakh crore.
First, there’s the classification issue. Most MUDRA loans fall under the microfinance category, which is already in a precarious position. NPAs (non-performing assets) are rising, and profits are falling. For context, in the first half of FY24, gross NPAs rose by 32%, in contrast to a 32% decline the previous year.
That’s a substantial number of loans not being repaid on time. It’s likely scaring the banks, as the microfinance model relies on trust, and MUDRA loans don’t have collateral. As that trust erodes, the consequences can be dire — rising NPAs leaving banks holding the bag.
Another issue is the government’s recent decision to increase the upper limit for MUDRA loans from ₹10 lakh to ₹20 lakh in the Tarun (now Tarun Plus) category. While this benefits small entrepreneurs who need more capital, it significantly increases the risk for banks, already wary due to past defaults.
Fraud is another serious problem
The easy, collateral-free money has attracted dishonest individuals. There have been cases where loans were taken for ghost businesses or misused for personal expenses. The RBI has even stepped in — debarring some microfinance companies and cracking down on “evergreening,” where new loans are used to repay old ones, creating the illusion of healthy accounts.
The microfinance model relies on group lending, where members are jointly responsible for each other’s loans to promote financial inclusion, especially in rural areas. But when communities face challenges — like poor harvests or economic downturns — defaults are inevitable. And since these loans are unsecured, lenders have no collateral to recover. This causes a ripple effect: microfinance companies struggle, banks take a hit, and genuine borrowers find it harder to access credit (Finshots article).
In August 2024, The Deccan Chronicle reported that most NPAs were reported by PSBs, which had a 79% share, followed by private banks with 9%. In terms of NPA accounts, PSBs had a share of 45%, followed by small finance banks at 24%. The number of NPAs under MUDRA loans has been rising at a CAGR of 23% since FY17, while the NPA amount has been growing at 37%. At the end of FY22, the total NPA amount under MUDRA loans was ₹40,456 crore, according to NITI Aayog. Public sector banks had the highest NPA ratio — 22.6% of accounts and 16.9% of disbursements.
Touted as a lifeline for small entrepreneurs, MUDRA has become a ticking time bomb — fuelling bad loans, political optics, and financial ruin.
Furthermore, the number of NPA accounts in the Shishu category has always been higher than in Kishore or Tarun. In terms of amount, Kishore account holders have contributed the most to NPAs since FY18. In FY22, Shishu had the highest number of NPA accounts at 42,20,135, while Kishore accounts reported a total NPA amount of ₹22,456 crore. The NPA share in the Kishore category was 6.23%.
An article in The Wire stated that the Finance Ministry was giving disbursement targets to PSBs, which were also pressured to lend to NBFCs for on-lending and co-lending. In many cases, ruling party cadres told borrowers that the loans were a “gift” and need not be repaid. As a result, NPAs increased, and banks wrote off 25% of the loan amounts, claiming 75% from the Credit Guarantee Fund. However, the borrower’s CIBIL score was affected. Many wilful defaulters now repay a small amount to clear their CIBIL score and borrow again, gaming the poorly designed system.
Analysis of the MUDRA Scam
The Finance Minister stated in Parliament in 2024 that MUDRA NPAs stood at just 3.43% — a claim that contradicts data from financial institutions. India’s CAG — headed by retired civil servants often chosen for their proximity to the regime — has never published any performance audit of this scheme.
Given the sustained economic distress since the pandemic, it is highly probable that NPAs have crossed ₹4 lakh crore by March 31, 2025 — more than the combined net worth of India’s top dozen CPSUs. If the NPA rate of PSBs and RRBs was 22.5% on an annual average disbursement of ₹1 lakh crore in 2022, NPAs may have reached ₹2.25–2.50 lakh crore. In 2019, then RBI Deputy Governor M.K. Jain estimated MUDRA-related NPAs at ₹3.21 lakh crore. Former RBI Governor Raghuram Rajan also warned of toxic loans under MUDRA and urged closer scrutiny.
Behind the smiles and slogans lies a massive public money swindle.
Five years later — particularly after the pandemic — that figure may have crossed ₹4 lakh crore. This, despite the fact that 80 crore individuals were fed free rations from 2020 to 2027 under direct orders from the PM — a move that has nearly bankrupted the central exchequer.
Clearly, a very substantial number of MUDRA loans have been siphoned off without any visible increase in beneficiary incomes. Apart from a few ‘brand ambassadors’ showcased in media events and YouTube videos, there is no consolidated database of beneficiaries, loan purposes, repayment records, bank details, or other critical information.
It is no coincidence that the ruling party’s membership crossed the 20-crore mark — touted as the world’s largest — around the time MUDRA was launched.
A key question arises: were MUDRA loans used to attract new party members, with verbal assurances that repayment would not be enforced? This theory aligns with reports by Finshots and The Wire. Notably, MUDRA loans were not extended to self-balancing SHGs, but rather to individuals.
Worsening economic distress — even in rural areas — suggests that MUDRA has failed to positively impact incomes. Instead, financial institutions are now flooded with applications for personal loans of up to ₹10,000 — many of which have also turned into NPAs.
Gold loan companies are publishing multi-page ads in national dailies, auctioning pawned jewellery defaulted on by borrowers. Food inflation has also hit hard. Although official inflation figures hover around 5%, the actual rate — based on daily life essentials — may be closer to 7–8%.
Anecdotal reports speak of children being withdrawn from expensive schools, downgraded health insurance policies, and other telltale signs of distress.
MUDRA may be this regime’s second-largest scam (after Operation Demonetisation), far exceeding even the electoral bonds scandal.
No one dares to estimate the true NPA amount, but consensus suggests a figure between ₹3–4 lakh crore — several times the net worth of India’s top 12 CPSUs. If the opposition fails to raise this issue of public resources being used as cash doles for political patronage, it deserves to become irrelevant.
And perhaps that is what keeps this regime alive — though certainly not well. 
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Shantanu Basu
Writer is a retired senior civil servant, public policy analyst, author and commentator.
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