Common Mudra Loan Challenges & How to Overcome Them

Managing a cash crunch and getting a business loan have long been 2 of the most serious issues for Indian MSMEs. Even today, 45% of business loan applications face rejection due lack of collateral and credit histories. It led to the introduction of Prime Minister MUDRA Yojana in 2015. However, some of the most common Mudra loan challenges can lead your application to rejection here, as well.

While MUDRA doesn’t provide loans directly, it makes it easy to get financing for small business owners, especially in a town or village. The scheme aims to simplify borrowing, yet applicants face delays and rejection due to incorrect documents and lack of awareness. Discover the most common Mudra loan application problems you will face and tips to overcome them.

What is a Mudra Loan?

MUDRA loans is a loan scheme by the Government of India that offers collateral-free, unsecured business loans to micro and small enterprises (SMEs). The Government of India launched the MUDRA Yojana, which stands for Micro Units Development and Refinance Agency Yojana, in April 2015 to cater to small businesses.

MUDRA, on the other hand, is a refinancing institution and financial services provider. It specifically caters to small businesses that often struggle to get business loans from traditional banking channels. It does not provide direct loans but offers them through banks, NBFCs and MFIs.

With MUDRA Yojana, you can get a collateral-free business loan of up to ₹20 lakh. It means that you don’t need to offer property or assets as security. This makes it ideal for small businesses, traders, artisans, street vendors, and micro-entrepreneurs who typically don’t have formal assets.

Mudra Loan Types

There are four different types of Mudra loans you can apply for based on your business needs. Here are the four categories of Mudra loan:

Type of Loan	Loan Amount
Shishu	Up to ₹50,000
Kishore	₹50,000 – ₹5 lakh
Tarun	₹5 lakh – ₹10 lakh
Tarun Plus	₹10 lakh – ₹20 lakh

Borrowers can avail of these types of business loans from public and private sector banks, NBFCs, regional rural banks, and microfinance institutions (MFIs). The aim is to empower the grassroots entrepreneur and generate employment.

Top Challenges Faced During Mudra Loan Application 

Like with any other business loan application, many small business owners face problems in Mudra loan applications that lead to rejection. Here are the Mudra loan challenges and tips to overcome them:

1. Lack of Awareness About Eligibility Criteria

Mudra loan is a relatively new scheme as compared to already existing traditional business loans. This is why there is less awareness about it in the business community. Like a traditional loan, Mudra loan has its own eligibility criteria. Many small business owners are either unaware of the eligibility requirements or consider they qualify by default, which is not always the case.

The lack of awareness also created confusion about whether to apply as an individual or business entity. Many applicants approach banks, NBFCs and MFIs as individuals rather than business entities, which creates confusion in documentation. Here is a list of eligible borrowers under Mudra loan:

• Individuals
• Sole proprietorship
• Partnership Firm
• Private Ltd. Company
• Public Company
• Any other legal forms

Solution: If you are a small business owner who wants to apply for a Mudra loan, you must ensure you meet its eligibility criteria. Choose beforehand whether you are applying as an individual or a business owner. Submitting individual documents but applying as a business entity will lead to business loan rejection. Register your business on the Udyam portal. It’s free and builds your credibility.

2. Incomplete or Incorrect Documentation

Documentation is a major pain point when applying for Mudra loans. Even a single missing or mismatched necessary Mudra loan document requirement can result in immediate rejection or delay. Some common issues include:

• Mismatch in Aadhaar and PAN card names
• Missing residential or business address proof
• No proof of business details (like Udyam registration, GST registration, shop license, utility bill with business name, etc.)
• Outdated bank statements or lack of income flow in the account

Solution: Banks require proof that you’re running a real, ongoing business. Make a document checklist before applying. Visit your local bank to verify that your documents match and are up to date.

3. Low or No CIBIL score for Mudra loan

Even though Mudra loans are meant to help first-time borrowers, banks still prefer applicants with some credit history. Banks may label you as New-to-Credit (NTC) and act cautiously if you haven’t taken any loans or credit cards.

On the other hand, if your CIBIL score is below 650 or you’ve had cheque bounces, EMI defaults, or late payments in the past, banks might decline your application outright. Also, many applicants don’t even know their credit score before applying.

Solution: This is why you must check if you meet the necessary CIBIL score for Mudra loan. If it’s low, pay off any old dues and build a clean repayment history using small-ticket loans or secured credit cards.

4. Lack of a Clear Business Plan 

For Tarun and Tarun Plus category loans, banks often ask for a basic business plan. However, many entrepreneurs apply without one, thinking it’s not required. Here is why you must create a solid business plan for business loan:

• Helps demonstrate business viability to the lender
• Shows how the loan amount will be used effectively
• Builds lender confidence in your repayment capacity
• Highlights your understanding of the market and competition
• Clarifies short-term and long-term business goals
• Serves as a roadmap for business growth and expansion
• Increases chances of loan approval under MUDRA scheme

Solution: Write a business plan that clearly states your needs, goals and repayment plan. You must also include cost estimates, expected earnings, profit margins, and repayment schedules. You can even get help from online templates or local business support centres.

5. Bank-Level Bureaucracy or Reluctance

Even though Mudra is a government-backed scheme, the experience at banks can be disheartening. Some branch managers or officers can discourage you by saying the loan isn’t available or demanding unnecessary paperwork.

Why? Processing small-ticket loans isn’t profitable for many banks, and they aren’t always trained to handle Mudra applications efficiently. Some prefer dealing with bigger clients or those who prefer secured loans.

Solution: Visit the bank branch where you already have an account. Bring all documents and politely insist on your right to apply under the scheme. If you face repeated denial, escalate the issue to higher authorities or switch to another lender, like an NBFC.

6. Delay in Processing and Lack of Updates

Once you apply, you may not hear back from the lender for weeks. No SMS, no emails, no status update. Rural branches or festival season workloads often overload staff and delay the process. Also, unlike home loans or personal loans, most banks don’t provide a central tracking ID for Mudra applications. This makes it tough to follow up.

Solution: After submitting your application, get a stamped acknowledgement of receipt from the bank. Make a follow-up call every week and keep a record. You can also visit udyamimitra. in to check options for applying online with better transparency.

7. Digital Access & Awareness Gaps in Mudra Loan for Rural Entrepreneurs

In small towns and villages, many people depend on cybercafes to apply online. But often, these centres don’t fill in the details correctly. They may leave fields blank or upload blurry documents. Applicants themselves may not understand what the form is asking for, especially if it’s in English. This leads to rejections or long delays.

Solution: Ask for help from a trained bank Mitra, Common Services Centre (CSC), or someone who has already received a Mudra loan. Many NGOs and MSME Development Centres also offer free support for rural entrepreneurs.

Top Reasons Why Mudra Loan Applications Get Rejected

Many applicants find their Mudra loan not approved because of a mistake they don’t know they committed. Here are the top Mudra loan rejection reasons you must rectify before applying:

• Incomplete or Mismatched Documents: Mistakes, like a different address on your Aadhaar vs your rental agreement, can lead to a Mudra loan not being approved.
• No Registered Business: If there’s no proof you’re actually running a business, banks hesitate. This is where a current account, Udyam registration, or transaction history helps.
• Unjustified Loan Amount: If you apply for ₹10 lakh to start a business with no history, banks will reject it due to lack of credibility.
• Bad Credit History: Past loan defaults or cheque bounces show up in CIBIL and create doubt and mistrust.
• Negative Bank Statement: Irregular deposits, multiple bounced cheques, or low average balance signals financial instability.
• Multiple Loans: If you’re already repaying 2-3 other loans, your debt-to-income ratio goes up, and that can lead to rejection.

How to Improve Chances of Mudra Loan Approval 

If you’re serious about getting your Mudra loan approved, you need to strengthen your application. Here are the best Mudra loan approval tips you can follow to get approval:

• Register Your Business: You must start by registering your business on Udyam. A registered business always creates more trust.
• Maintain a Healthy Bank Statement: Show regular income (at least ₹10,000-₹15,000/month) and avoid frequent cheque bounces.
• Ensure Document Consistency: Names, addresses, and business details should match across PAN, Aadhaar, utility bills, and bank statements.
• Write a Good Business Plan: Explain where you’ll spend the money, how much you’ll earn, and how you’ll repay.
• Apply through Familiar Banks: Banks, where you hold a savings/current account, are more likely to trust you and approve the application.
• Choose the Right Loan Category: Don’t over- or under-apply for a Mudra loan. If you need ₹50,000, apply for Shishu, not Kishore.
• Fix Credit Issues Early: Check your CIBIL report and clear any disputes or old dues before applying.
• Follow Up Regularly: Visit the branch, keep track of conversations, and be respectful but persistent.

Where to Apply for Mudra Loan the Right Way

You can apply for a Mudra loan through several channels and lenders, and all of them have their own benefits. You can choose any authorised bank for Mudra loan and also explore the option for Mudra loan apply online through official government portals.

Types	Lenders
Public banks	SBI, Canara Bank, PNB, Bank of Baroda and more
Private banks	Axis Bank or HDFC (mainly for the Tarun category)
NBFCs & MFIs	FlexiLoans, LendingKart, IIFL, Bajaj finserv, Kinara Capital, Aditya Birla Capital
Udyami Mitra Portal	A great option to apply digitally with status tracking
Jan Dhan Accounts	If you have one, you can apply through your bank directly

Conclusion

Despite all the challenges and mistakes, the lenders have disbursed over ₹33+ lakh crore in Mudra loans. This doesn’t just show the disbursed amount but also the growing number of businessmen and businesswomen flourishing in India. However, getting approval requires more than just filling out a form. You can improve your chances of Mudra approval with correct document submission and knowing the eligibility criteria.

If you want to apply for a small business loan with favourable terms, FlexiLoans is an excellent choice. At FlexiLoans, we ensure instant approval options with zero collateral to ensure your assets are safe and you have quick access to business financing. Call our loan experts now and take a step towards growth and success.

FAQs about Problems in Mudra Loan Application