Business Loan and Mudra Loan: Limits, Rates, How to Apply

A Mudra loan is a collateral-free business loan of up to ₹20 lakh under the Pradhan Mantri Mudra Yojana (PMMY), given by banks, NBFCs and microfinance institutions to micro and small non-farm businesses. If your business is small and you lack property to pledge, Mudra is usually the first scheme to check; for larger amounts or established firms, a regular business loan, possibly backed by CGTMSE, is the better fit.

What is the PM Mudra Yojana?

PMMY was launched in 2015 to fund "the unfunded" — small shopkeepers, traders, artisans, service providers and micro manufacturers who struggle to get bank credit. MUDRA (Micro Units Development and Refinance Agency) itself does not lend to you directly. It refinances the banks, NBFCs, small finance banks, regional rural banks, co-operative banks and microfinance institutions (MFIs) that do.

Loans are guaranteed by the Credit Guarantee Fund for Micro Units (CGFMU), which is why lenders can skip collateral and third-party guarantors.

Mudra loan categories and limits

The Union Budget 2024-25 raised the overall ceiling from ₹10 lakh to ₹20 lakh by adding a fourth category, Tarun Plus.

The loan can be a term loan (for machinery, vehicles for commercial use, shop fit-out), a working capital limit such as an overdraft or cash credit, or a combination. Repayment periods for term loans are typically 3 to 7 years depending on the lender; Indian Bank, for example, lists up to 84 months for Tarun Plus term loans.

Who is eligible

• Any Indian individual, proprietorship, partnership, LLP or company running or starting a micro or small enterprise in manufacturing, trading or services.
• Activities allied to agriculture — dairy, poultry, fisheries, beekeeping, food processing — are covered. Pure crop loans are not.
• You should not be a defaulter with any bank or financial institution, and a reasonable credit history helps, though Shishu lending is designed for first-time borrowers.
• Personal, consumption or housing needs are not eligible.

GST registration is not mandatory. A shop and establishment licence, trade licence or Udyam registration can serve as proof of business for units below the GST threshold.

Mudra loan interest rate

There is no government-fixed Mudra rate. Each lender sets it under its board-approved policy, typically as its MCLR or repo-linked rate plus a spread. Public sector banks are usually the cheapest; NBFCs and MFIs charge noticeably more because they serve riskier segments. As one example, Indian Bank prices its Tarun Plus loans at its one-year MCLR plus 3%.

Because the RBI raised the repo rate by 25 basis points to 5.50% on 7 October 2026, benchmark-linked business loan rates are more likely to drift up than down in the coming months. See how this flows into EMIs in our guide to repo rate impact on EMI.

Processing fees and the CGFMU guarantee fee also vary by lender. Some banks absorb the guarantee fee, others recover it from the borrower, so ask for the full cost in writing before signing.

Mudra vs other business loan options

The CGTMSE guarantee ceiling was raised from ₹5 crore to ₹10 crore with effect from 1 April 2025. If you own property and need a big ticket at a lower rate, compare a loan against property.

Worked example: Mudra Tarun vs an unsecured business loan

Suppose a small packaging unit needs ₹8 lakh for a machine, repayable over 5 years (60 months).

Option A — Mudra Tarun loan at 10% a year

• Monthly rate = 10 / 12 / 100 = 0.008333
• EMI = P × r × (1 + r)^n / [(1 + r)^n − 1] = ₹16,998
• Total paid = ₹16,998 × 60 = ₹10,19,880; interest = ₹2,19,858

Option B — Unsecured NBFC business loan at 18% a year

• EMI = ₹20,315
• Total paid = ₹12,18,900; interest = ₹4,18,885

The cheaper Mudra loan saves about ₹3,317 a month and nearly ₹2 lakh in interest over five years. The rates here are illustrative; plug in actual quotes from lenders with our EMI calculator before you decide.

Documents required

Requirements vary by lender and loan size, but a typical list is:

1. KYC: PAN and Aadhaar of the proprietor, partners or directors; photographs.
2. Business proof: Udyam registration, GST certificate (if registered), shop and establishment or trade licence, partnership deed or incorporation documents.
3. Address proof of the business premises (rent agreement or ownership proof, utility bill).
4. Bank statements for the last 6 to 12 months.
5. Project report or business plan for Tarun and above, with quotations for machinery or equipment to be bought.
6. Income proof: ITRs, balance sheet and profit and loss account for existing businesses (often 2 years for larger loans).
7. For Tarun Plus, proof that the earlier Tarun loan was fully repaid (closure certificate or account statement).

How to apply for a Mudra loan

1. Decide the amount and category. Borrow what the business plan supports; overborrowing at a small scale is a common cause of default.
2. Choose a lender. Start with the bank where your business account already runs, since it can see your cash flows.
3. Apply. Visit the branch, use the bank's website, or apply through Jan Samarth (jansamarth.in) or SIDBI's Udyamimitra (udyamimitra.in) portals.
4. Appraisal. The lender checks your credit report, bank statements and business viability, and may inspect the premises.
5. Sanction and disbursement. You receive a sanction letter and Key Fact Statement listing the rate, fees and repayment schedule. Read them before signing.

Never pay an "agent" to get a Mudra loan sanctioned. Banks do not use such middlemen, and fake Mudra loan websites and calls asking for an upfront "file charge" are a known fraud pattern. Our guide on fake loan app fraud explains how to report such approaches.

Tips to improve approval chances

• Keep a clean CIBIL record, both personal and (if applicable) the business's commercial report. See how to improve CIBIL score.
• Route business income through one current account so the lender can see real turnover.
• Register on Udyam. It is free and helps establish your status as a micro or small enterprise.
• Prepare a simple, realistic project report showing how the loan will generate enough cash to cover the EMI with a margin.
• Bring a promoter contribution where asked. Some banks expect you to fund part of larger projects yourself (Indian Bank, for instance, lists a 20% margin for Tarun Plus).
• Repay well. Clean repayment of a Tarun loan is the gateway to Tarun Plus and to larger CGTMSE-backed limits.

Key takeaways

• Mudra loans are collateral-free business loans for micro and small non-farm units, in four tiers: Shishu (₹50,000), Kishore (₹5 lakh), Tarun (₹10 lakh) and Tarun Plus (₹20 lakh, only after repaying a Tarun loan).
• Interest rates are set by each lender, not the government; public sector banks are usually cheapest, NBFCs and MFIs costlier.
• For larger needs, CGTMSE now guarantees MSE loans up to ₹10 crore without collateral, and Stand-Up India funds SC/ST and women-led greenfield units from ₹10 lakh to ₹1 crore.
• A few percentage points of interest matter: on ₹8 lakh over 5 years, 10% vs 18% is a difference of about ₹2 lakh.
• Apply directly through a bank or official portals such as Jan Samarth and Udyamimitra, and never pay an agent an upfront fee.