Mudra Loan Interest Rate Explained: How Banks Calculate It

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One of the most common questions I hear from entrepreneurs walking into my office is: “Sir, what is the exact Mudra loan interest rate?” And almost every time, they assume there is one fixed number that applies everywhere. That is a misconception. Two borrowers applying at the same bank branch, on the same day, for the same loan amount, can receive different interest rates. The rate you get depends on how the bank evaluates you, your business, and your risk profile. In this article, I will explain exactly how banks determine Mudra loan interest rates so you can walk into the bank fully prepared.

Key Takeaways

Under Pradhan Mantri Mudra Yojana (PMMY), there is no single fixed Mudra loan interest rate. Each bank decides its own rate within RBI guidelines.
MUDRA loan interest rates typically range from 8.50% to 24.00% per annum. Public sector banks typically offer lower interest rates, starting around 8.50%–10.50% p.a. for good borrowers, while NBFCs and MFIs can charge up to 18%–22% or more for higher-risk cases.
The final rate of interest depends on the bank’s internal lending policy, your credit score, business profile, and whether the rate is linked to MCLR or Repo Linked Lending Rate (RLLR).
A strong credit score improves the chances of obtaining a lower interest rate. Applicants can also reduce their Mudra loan interest rate by maintaining clean bank statements and submitting a strong, CA-prepared project report and CMA data.

What Is PM Mudra Loan and How Is Interest Decided?

Pradhan Mantri Mudra Yojana, commonly known as PMMY, was launched on 8 April 2015 by the hon’ble prime minister to provide collateral free loans to non corporate micro enterprises and small businesses across India. The scheme is operated through MUDRA Ltd., which functions as a micro units development and refinance agency under the Government of India. Mudra loans provide funding specifically for micro and small businesses engaged in manufacturing, trading, services, and allied agriculture activities.

The scheme covers three standard categories – now expanded to four:

Shishu loans: loan upto rs 50,000
Kishor loans: from Rs 50,001 to rs 5 lakh
Tarun loans: from Rs 5 lakh to rs 10 lakh
Tarun Plus: from rs 10 lakh to 20 lakh, introduced in the Union Budget 2024–25, available to entrepreneurs who have successfully repaid previous loans under the Tarun category

MUDRA loans are collateral-free up to Rs. 10 lakh. The credit guarantee fund for Micro Units (CGFMU) backs these loans, so banks don’t need collateral security from borrowers. But here is the part most applicants miss: the government does not prescribe one fixed interest rate. It provides the scheme framework, refinance support, and guarantee coverage, but individual borrowers receive rates determined by each financial institution’s own lending policy.

Current Mudra Loan Interest Rate Ranges (Shishu, Kishor, Tarun & Tarun Plus)

Let me share the practical ranges I see across banks as of 2025–26. Mudra loan interest rates range from 9% to 24% per annum depending on the lender type and the applicant’s profile.

The image depicts a small business storefront in a bustling Indian market, with a friendly shopkeeper standing at the counter, ready to assist customers. This vibrant scene highlights the entrepreneurial spirit, which is supported by various financial schemes like the Pradhan Mantri Mudra Yojana, offering affordable interest rates and collateral-free loans for small businesses.

Shishu (up to Rs 50,000): Shishu loans up to ₹50,000 have the lowest interest rates among all Mudra categories. In public sector banks, rates typically fall between 8.50%–12% p.a. for standard-risk borrowers. NBFCs and MFIs may price higher.
Kishor (Rs 50,001 – Rs 5 lakh): Kishore loans start from around 8.60% per annum in public sector banks. For most applicants, expect the 9%–14% p.a. band, moving upward based on risk rating, repayment capacity, and facility type.
Tarun (Rs 5 lakh – Rs 10 lakh): Tarun loans generally carry interest rates between 11.15% and 20%. PSU banks may quote 10%–16% p.a., while private banks and NBFCs push towards the upper end for weaker profiles. For larger Mudra loan amounts, the interest rates may be higher due to increased risk.
Tarun Plus (Rs 10 lakh – Rs 20 lakh): Pricing aligns with the higher end of Tarun rates. Only borrowers who have avail loans under Tarun and fully repaid them are eligible. A clean track record of repaying previous loans can help secure competitive interest rates.

Public sector banks typically charge 9% to 13% interest rates, while NBFCs and other financial intermediaries can go up to 20%–24% p.a. Within the same category, two individual borrowers may receive very different rates because of credit score, business stability, financials, and bank relationship.

Who Actually Decides Mudra Loan Interest Rates – Government, RBI or Banks?

This is where most confusion exists. Let me break down each authority’s role:

Central Government and MUDRA Ltd: The government launched Pradhan Mantri Mudra Yojana and MUDRA as a refinance agency. It sets eligibility criteria, defines categories, and funds the credit guarantee fund. But it does not publish or enforce a uniform interest rate for all banks.
Reserve Bank of India (RBI): The reserve bank issues broad regulations on lending – benchmark rate frameworks like MCLR and External Benchmark Linked Rates (Repo Linked Lending Rate), prudential norms, and transparency requirements. RBI allows banks flexibility to set spreads and customer-specific pricing. Market conditions play a significant role in determining interest rates through RBI’s policy stance.
Individual Banks and MLIs: The actual Mudra loan lending rate you see in your sanction letter is decided by public sector banks, private banks, RRBs, small finance banks, NBFCs, and MFIs. Each lender uses its Board-approved credit policy, internal rating models, and cost-of-funds calculations to decide how much spread and risk premium to add over their benchmark.
The bottom line: Government supports PMMY with guarantee and refinance. Banks and institutions actually fix and offer Mudra loan interest rates to customers.

How Banks Calculate Mudra Loan Interest: From Repo/MCLR to Your Final Rate

When a bank prices your Mudra loan, it is not arbitrary. Here is the step-by-step breakdown of how your interest rate is built:

Cost of funds: Banks first calculate what they pay depositors and other lenders. If the average cost is around 5.50%–6.50%, their lending rate must cover this plus operational expenses and profit.
Benchmark rate (RLLR or MCLR): Many banks now link Mudra loans to RBI’s repo-linked external benchmark (RLLR) or their internal MCLR. When RBI changes the repo rate, the RLLR moves, and your floating Mudra interest gets revised accordingly at the next reset date.
Bank spread: Over the benchmark, each bank adds a basic spread to cover operating costs and margin. For example, if RLLR is 8.75% and the bank adds a 1.25% spread, the base lending rate becomes 10.00%.
Credit risk premium: Borrowers with higher CIBIL scores, stable income, and clean bank statements may pay only 0.25%–1% extra. Weak profiles may attract 2%–5% additional premium. This is why creditworthiness matters so much.
Administrative and guarantee costs: While Mudra loans are collateral-free and covered by CGFMU, banks still bear guarantee fees, administrative costs, and expected credit losses. These are built into the pricing.
Numeric example: Consider a Kishor loan applicant with standard risk. If the bank’s RLLR is 8.75%, basic spread is 1.25%, and customer risk premium is 1.00%, the final Mudra loan interest rate works out to 11.00% p.a. Indian Bank’s published annexure shows similar breakdowns – repo 5.25% plus spread and premiums resulting in effective rates of ~9.55% to ~10.60% depending on exposure.

In practice, the bank’s internal system auto-calculates the rate once the relationship manager enters the credit rating, loan amount, and product code. Negotiation is possible, but only within a limited band approved by the sanctioning authority.

A professional banker is seated at a desk, intently reviewing various documents with a calculator nearby, likely assessing loan interest rates and financial details for borrowers. The scene suggests a focus on providing services such as mudra loans and business loans to support entrepreneurs in achieving their financial goals.

Key Factors That Change Your Mudra Loan Interest Rate

Think of these as a checklist. Each factor directly affects what rate you will actually pay:

Business profile and vintage: Established shops, service units, or manufacturing units with 3+ years of stable sales usually get better pricing than brand-new, untested businesses. Business stability is one of the core factors banks evaluate.
Loan amount and category: Shishu loans generally enjoy lower or concessional interest rates. As you move to Kishor, Tarun, and Tarun Plus (up to rs 20 lakh), the exposure increases and so does the pricing band. Your business requirements must justify the amount requested.
Credit score and past repayment: Factors influencing MUDRA loan interest rates include credit score, loan category, and business stability. A CIBIL score above 750 with no write-offs or settlements is often rewarded with lower interest rates. Past irregularities or high unsecured borrowings lead to a higher risk premium.
Existing relationship with bank: Current account customers who route regular turnover, maintain balances, and have existing loans with clean repayment history often get interest concessions of 0.25%–1% compared to walk-in applicants.
Business income stability and banking pattern: Consistent monthly credits, limited cheque returns, and a clear GST trail give comfort to the credit officer and pull the rate towards the lower end of the bank’s grid.
Industry and location risk: A medical shop or essential services provider in an established market is seen as lower risk than speculative or highly seasonal trades in remote areas. Location and nature of business affect pricing.
Type of facility: Working capital limits and cash credit sometimes carry slightly higher rates than term loans for asset purchase, because of usage volatility and monitoring needs.
Quality of project report and documentation: From my experience, a detailed, realistic project report with CMA data and proper financial documents reduce perceived risk and help the banker justify a lower rate to the sanctioning authority. Interest rates depend on borrower creditworthiness and business type – and your documents are how you prove both.
Loan tenure: Loan tenure affects the interest rate offered to borrowers. Longer repayment tenure may attract slightly different pricing as the bank’s exposure period increases.
Collateral (if offered voluntarily): While Mudra loans are collateral-free by design, collateral value influences the interest rates for Mudra loans. If a borrower voluntarily offers assets as security, some banks may consider a rate concession.

Fixed vs Floating Mudra Loan Interest, RLLR and MCLR – In Simple Language

Fixed vs floating: A fixed interest rate means your EMI stays constant throughout the repayment tenure. A floating interest rate moves with the benchmark – up or down. Most Mudra loans are sanctioned on floating rates linked to RLLR or MCLR. Fixed rate Mudra loans are uncommon and usually offered only for very short tenures or special schemes.

Fixed gives EMI certainty but the initial rate may be slightly higher
Floating can become cheaper when RBI reduces the repo rate, but EMIs can also increase when repo goes up

Repo Linked Lending Rate (RLLR): The repo rate is the rate at which RBI lends to banks. Many banks now price Mudra loans as “Repo Rate + Bank Spread.” When RBI changes the repo rate during its Monetary Policy meetings (generally every two months), the RLLR and your interest may change after the next reset date.

Simple example: If RBI repo is 6.50% and bank spread is 3.00%, your RLLR becomes 9.50%. If RBI cuts repo to 6.00%, RLLR drops to 9.00%, and your floating Mudra rate also reduces, lowering your EMI or shortening tenure.

MCLR: Some banks still link Mudra loans to MCLR – their internal cost-based benchmark. The main difference is that MCLR moves slower than repo-linked rates and has periodic reset dates (typically 6-month or 1-year reset). MCLR-linked loans may not immediately pass on benefits of rate cuts, but they also don’t increase as quickly when rates rise.

Impact on EMI: To make this real – on a typical rs 5 lakh Mudra term loan over 5 years, even a 1% change in interest rate can change your monthly EMI by approximately Rs 250–300 and total interest by Rs 15,000–18,000 over the full tenure. This is why understanding whether your loan is on fixed or floating rate matters.

EMI and Interest Calculation Example for a Mudra Loan

Let me walk through a realistic example so you can see exactly how this works.

Case: A Kishor Mudra loan of Rs 5,00,000 at 11.50% p.a. for 5 years (60 months).

On a reducing balance basis, the approximate EMI works out to around Rs 11,020 per month. Here is how it plays out:

First month’s interest: 11.50% ÷ 12 × Rs 5,00,000 = approximately Rs 4,792. The remaining Rs 6,228 from your EMI goes toward repaying the principal.
Second month onwards: Interest is calculated on the reduced outstanding principal (Rs 5,00,000 minus Rs 6,228 = Rs 4,93,772), so each month the interest component decreases and the principal repayment portion increases.
Over 60 months: You pay approximately Rs 6,61,200 in total. Out of this, roughly Rs 1,61,200 is total interest and Rs 5,00,000 is principal repayment.

The image depicts hands using a calculator amidst business papers and a laptop on a desk, illustrating the financial planning process often associated with managing loan amounts and interest rates, such as those offered under the Pradhan Mantri Mudra Yojana. This scene reflects the careful calculations that individuals and entrepreneurs make to successfully navigate their business financing needs.

Borrowers can use online Mudra loan EMI calculators to test different combinations of loan amount, tenure, and interest rate before applying. This is a simple but powerful way to plan your finances.

On prepayment: If your bank permits part-prepayment without heavy foreclosure charges, paying extra whenever you have surplus funds can significantly reduce total interest outgo. Always check the sanction letter for nil or minimal prepayment penalties. Many PSU banks charge nil foreclosure charges on floating rate Mudra loans for individual borrowers.

Why Different Banks and Borrowers Get Different Mudra Interest Rates

Every bank has a different cost of funds, business strategy, and risk appetite. PSU banks may focus on financial inclusion and offer mudra loans at lower interest rates, while some NBFCs focus on speed and flexibility, charging higher interest to cover their higher cost structure and risk.

Internal risk rating models differ across institutions. One bank may treat a small trader in a semi-urban area as moderate risk; another may consider the same profile as higher risk and price accordingly. This is why a Mudra loan interest comparison across lenders always reveals different numbers.

Borrower A vs Borrower B:

Parameter	Borrower A	Borrower B
Business age	5 years, GST-registered	New, 6 months old
CIBIL score	780	650
Banking pattern	Regular credits, no bounces	Irregular, some returns
Documents	CA-certified financials, project report	Incomplete, no project report
Likely rate	~10.25% p.a.	~14%–16% p.a.

Long-standing customers can sometimes negotiate a 0.25%–0.50% reduction, especially when they have multiple accounts or deposits with the bank. Walk-in customers with no prior relationship have less room to bargain.

The “lowest advertised rate” is typically available only to top-rated customers. Most real borrowers fall somewhere in the middle of the bank’s pricing grid.

For comparison, traditional business loans typically range from 8.00% to 18.00% per annum, while interest rates for personal loans typically range from 9.99% to 24.00% per annum. Mudra loans sit in a similar band but offer the advantage of being collateral-free and government-backed through the guarantee scheme.

How to Reduce Your Mudra Loan Interest Rate – Practical Tips from a CA

In my 20+ years of practice, I have seen that borrowers who prepare well before applying consistently get better rates. Here is what I recommend:

Fix your CIBIL score first. Check your score 3–6 months before applying. Close unnecessary credit cards, pay existing EMIs on time, and avoid fresh unsecured personal loans. Even a 50-point improvement can shift you into a lower risk bracket.
Clean up your bank statements. Limited cheque bounces, stable minimum balance, and clear business credits over the last 6–12 months strengthen your application materially.
Get a professionally prepared project report. A realistic project report with CMA data, properly structured term-loan and working-capital requirement, and accurate financial projections carry serious weight with the credit officer. This is not just paperwork – it directly influences the rate the bank offers.
Apply at the right bank. Your existing account-holding PSU or private bank where the business already routes turnover is usually a better first choice than approaching a completely new lender. Relationship history helps in pricing.
Maintain compliance. Udyam registration, timely GST filing, proper business licences, and accurate financial statements reassure the bank. Women entrepreneurs and first-time entrepreneurs should also check if any special interest subvention scheme applies to their category.
Understand total cost. Ask clearly for the applicable rate, reset frequency, processing fees, and any other charges. Affordable interest rates mean little if hidden charges push up the overall cost. Always request a written sanction letter with full details before accepting.

Expert Support from ProjectReportBank.com for Better Mudra Loan Terms

With 20+ years of hands-on experience in MSME finance, project reports, CMA data, and Mudra loan consultancy, I understand how Indian banks actually evaluate and price Mudra loans at the branch and credit-processing-cell level.

At ProjectReportBank.com, we help entrepreneurs prepare bank-ready Mudra project reports, CMA data, projected financial statements, and arrange supporting documents exactly in the sequence banks expect – reducing queries and delays. Clients are guided on choosing the appropriate Mudra category (Shishu, Kishor, Tarun, Tarun Plus), balancing term loan and working capital, and presenting realistic profitability and cash-flow so the banker is comfortable offering competitive interest rates.

If you are serious about securing a Mudra loan at affordable interest rates, invest in proper documentation instead of submitting a weak, incomplete file. The difference in interest rate alone can save you thousands of rupees over the loan tenure. You can also check the maximum Mudra loan amount you are eligible for before approaching the bank.

The image depicts an entrepreneur shaking hands with a financial advisor in a modern office, symbolizing a successful partnership in securing business loans. The setting conveys a professional atmosphere where discussions about loan interest rates, including competitive rates for mudra loans, are likely taking place.

Frequently Asked Questions on Mudra Loan Interest Rate

Is there any government subsidy on Mudra loan interest?

PMMY itself does not provide a universal interest subsidy. Banks charge normal commercial Mudra loan interest rates as per their internal policy. However, some specific government schemes – for example, certain state-level schemes for women entrepreneurs or particular sectors – may offer limited interest subvention routed through banks. These are scheme-specific and location-specific; they are not a standard feature of every Mudra loan. Do not confuse the credit guarantee fund support (which protects the bank, not your interest rate) with an interest subsidy.

Can my Mudra loan interest rate change during the tenure?

Yes, if your loan is sanctioned on a floating rate linked to RLLR or MCLR, the interest rate can change at each reset date as specified in the sanction letter. Reset frequency varies by bank – it could be quarterly, half-yearly, or annually. When RBI increases or decreases the repo rate, your EMI or repayment tenure may adjust accordingly. For fixed-rate Mudra loans (which are less common), the rate remains constant for the agreed fixed period.

Can I shift my Mudra loan to another bank for a lower rate?

Balance transfer or takeover of Mudra loans is possible in some cases, especially for larger Kishor, Tarun, or Tarun Plus limits where you have a clean repayment history. The new bank will reassess your eligibility from scratch, may charge a processing fee, and will sanction at its own interest rate based on your current profile. If the rate differential is significant (say 2%+ lower) and you have a strong track record, it can be worth exploring.

What is the minimum and maximum interest rate I should realistically expect?

In practice, good-profile borrowers in public sector banks may get Mudra interest as low as around 8.50%–9.50% p.a. On the other end, higher-risk customers, or those borrowing through NBFCs and MFIs, can see rates going towards 20%–24% p.a. depending on risk, location, and product. The exact rate varies based on your profile at the time of application and the specific lender’s policy.

Can I get a Mudra loan without ITR or GST returns, and will that affect interest?

For very small Shishu or informal businesses, some banks may process Mudra loans primarily on the basis of KYC, basic business proof, and bank statements. However, the absence of proper ITR or GST returns usually pushes the application into a higher-risk bracket. This means either stricter assessment, higher interest rate, or both. Eligible applicants with proper tax filings and compliance almost always expand their chances of getting approved at lower interest rates.