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An elongated guarantee claim settlement process and tighter loan reporting requirements appear to have hobbled the Pradhan Mantri Mudra Yojana (PMMY), which promotes collateral-free lending to micro enterprises, thereby supporting the larger agenda of inclusive finance.
All this points to the reluctance of banks to cater to the “missing middle” segment. The reasons are not far to seek. First, inadequate credit history on small businesses and the tedious process involved in claim settlements discourages banks from extending credit to micro and small enterprises. Second, the risk-reward mechanism under the refinance component of PMMY favours MFIs over banks and NBFCs. Lending margins for banks and NBFCs remain capped at about three per cent and six per cent, respectively, compared with 10 per cent for MFIs. Third, loans of up to Rs0.5 lakh are largely unsecured loans to women borrowers extended by MFIs. The top three states have greater penetration of MFIs, which have led disbursements under the sub-Rs0.5 lakh loan category.