~ By Priyang Pandey
MUDRA Bank or Micro Units Development and Refinance Agency Bank is aregulatorand a one stop solution for developing and refinancing the micro-finance institutions (MFIs) and to implement ‘credit guarantee scheme’for micro enterprises in India which according to NSSO survey of 2013 comprises over 5.77 crores business units.
Modi government announced MUDRA in the 2015-2016 Budget for refinancing micro & small-scale industries that is expected to give a big push to MSME sector, which contributes about 90% of the non-farmingjobs in India. Mudra bank was officially launched by the Prime Minister on 8th April, 2015.
Micro and Small Scale Industry in India
A micro enterprise is an enterprise where investment in equipment or plant and machinery does not exceed Rs 25 lakh; small enterprises are those enterprises where the investment in plant and machinery is more than Rs 25 lakh but does not exceed Rs 5 crores. In India Small and Micro Industrial sector with unorganised sector together provide over 46 crores jobs.This is greater than the organised sector, which provides less than 10% of the total non-farming jobs in India.
The informal sector and employment
Over the years, various surveys conducted by the government as well as industry bodies have found that most of the credit disbursed by the commercial banks goes to organised sector industries, whereas the micro and small industries gets only 4% of its credit needs from Financing Institutions (FIs). These FIs have been setup to help in creating self-employment opportunities by providing easy loan facilities to small and informal units, which are the economic driver of a major chunk of population.
Interestingly though, the corporate sector is considered to be the growth driver of the economy for the last two decades since 1991, with access to almost every possible financing option, tax leverages and other benefits. Yet, this segment is capable of feeding just 2.9 crores households. A study titled ‘India’s better half : the informal sector economy’ by Credit Suisse clearly states that half of India’s GDP and 84% of all non-agricultural work is informal. In fact, theinformal economy in India is much larger than in most Emerging Markets (EMs).
The intuitive habit of drawing macroeconomic conclusions from the corporate feedback (and vice versa) is fraught with risks. After all, only half of India’s GDP and 10% of India’s employment are in the formal sector. Further, only a fraction of the formal sector is listed. To take investments for example, investors intuitively use feedback from large capital goods and construction companies to form a view on India’s investment cycle. This can be misleading since ‘the tail is unlikely to wag the dog’.
Micro Financing in India
Micro Finance is an economic development tool whose objective is to assist the poor to work their way out of poverty. It covers a range of services which is in addition to the provision of credit. These services are savings, insurance, and fund transfers, counselling etc. The microfinance sector has grown rapidly over the past few decades. Banks have also leveraged the channel of Self-Help Group (SHGs) to provide direct credit to group borrowers. The Indian economy largely comprises of micro-units, mostly in manufacturing, trading or service activities, which are ‘self-financed enterprises’. And it is this informal sector which keeps most of the India employed and helps in sustaining economic growth. Interestingly, in the social context, according to the government of India most of these small enterprises are owned by the people belonging to socially and economically Backward Classes.
New Initiative of Financial Inclusion
With the financial inclusion programme ‘Jan DhanYojana’ emerging as a major policy instrument in the country, microfinance has occupied centre stage as a promising channel for extending financial services to unbanked sections of population and to nurture the small and micro entrepreneurial ecosystem. At the same time, practices followed by certain lenders have subjected the sector to greater scrutiny, hence the need for strict regulation.
The government proposed the setting up of the MUDRA Bank and made it responsible for regulating and refinancing all Micro-Finance Institutions (MFIs) which are in business of lending to micro and small business entities engaged in manufacturing, trading and service activities.
As per release of Ministry of Finance, Government of India, the Bank would partner with state level and regional level co-ordinators to provide finance to Last Mile Financer (LMF) of micro and small business entities.
Functions assigned to MUDRA
The MUDRA Bank is primarily responsible for laying down policy guidelines for micro/small enterprise financing business including registration, regulation and accreditation /rating of MFI entities. MUDRA would be laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery besides development of standardised set of covenants governing last mile lending to micro/small enterprises. It would also promote right technology solutions for the last mile financers.The NITI Aayog also points to India’s continuing challenge to ensure that this economically vibrant group remains engaged and its potential is fully realised. Taking cognisance of this, the most important responsibility that is mandated to MUDRA is to formulate and run a Credit Guarantee Scheme (CGS) for providing guarantees to the loans which are being extended to micro-enterprises and to create a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of PradhanMantri MUDRA Yojana.Under the aegis of the PradhanMantri MUDRA Yojana, MUDRA has already created its initial products/schemes. These interventions have been named ‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage ofinitiation, growth / development and funding needs of the beneficiary micro unit / entrepreneur and also provide a reference point for the next phase of graduation / growth to look forward to:
- Shishu : covering loans up to Rs 50,000/-
- Kishor : covering loans above Rs 50,000/- and up to Rs 5 lakh
- Tarun : covering loans above Rs 5 lakh and up to Rs 10 lakh
It is to be ensured that at least 60% of the credit flows to Shishu Category Units and the balance toKishor and Tarun Categories.
MUDRA Bank was created with a corpus sum of Rs 20,000 crores that was allocated from the money available from shortfalls of Priority Sector Lending for creating a Refinance Fund to refinance all types of MFIs and Last Mile Financers. Another corpus of Rs 3,000 crore was provided to MUDRA Bank from the budget to implement Credit Guarantee scheme for ensuring loans to the micro enterprises.
The above measures are not only helping in increasing access of finance to the unbanked but also in bringing down the cost of finance from the Last Mile Financers to the micro/small enterprises, most of which are in the informal sector.
For financing the small and cottage industries, previous governments from time to time provided infrastructure to support this sector. SIDBI or ‘Small Industries Development Bank of India’ was mandated to provide easy funds to cottage and micro industrial units but the smaller point of presence of the last mile financers did not deliver efficiently. In addition there are many other players in the micro finance sector like SHG (Self Help Groups) Bank Linkage model started by NABARD, Non-Banking Financial Companies and other trusts, societies. Currently, the Existing financing mechanism or the MFIs are primarily dependent on commercial banks for money. Commercial Banks are required to channel 40% of their loans to the ‘priority sector’ which includes agriculture and other small loans, and they redirect money to these MFIs to meet the targets.
The MFIs provides loan at a very high cost as the banks and other refinancing agencies charge12.5% (PLR) interest to these last mile financers and they add an additional spread of 10-11% to meet their operating cost. Consequently, loans extended by these micro units’are priced at around 23%-24%.
Most of these financers extend support to the private limited firms like proprietorship firms; partnership firms and trusts which are considered as a major share of micro industries are deprived for funds.Margin money is also an important concern for these micro units as the existing financing sector requires them to provide for a margin amount of 33%. This forces the borrowing-units to seek funds from local money lenders where the interest ranges from 36% to even 360% andleads to exploitation of these people.
MUDRA Bank is to take over some of the refinancing activities of SIDBI and channel the money in a more focussed way to pave the path of inclusive growth and development and reach out to last downtrodden person – ‘Antyodaya.’.
How it happened
In the budget of 2014, the idea of creating a new financial architecture for providing funds to the micro business units was introduced and to realise it, a committee was constituted. The committee submitted its report in February, 2015 rejecting the idea of creating a separate development and regulatory refinancing bank stating that the Reserve Bank of India had opposed it as a risk prone step.
But the NDA government was convinced that the existing financial system would not fund these micro industrial setups which in reality are the backbone of job creation in our nation. By ignoring the committee report, with the aim of improving the health of the micro and small scale sector, the government went ahead and established the MUDRA Bank. The Finance Minister emphasising in his budget speech that the ‘inclusive growth’ can only be achieved thought he growth of the non-formal sector.
Why MUDRA Bank
Conventional economic wisdom emphasises investment for growth of production or increase in its all-round spectrum by adding capital. This would certainly raise productivity but would not integrate the poor income/ real goods/ services generating activity. If we approach the problem of rural development from the view point of bringing the poor into the income generating activity by making them directly productive, we can make their life meaningful.
The current government focuses on poverty elimination rather than just alleviation which can be made a reality only if the poor are integrated into the national economic framework by involving them in their own ventures on a continuous basis. To nurture the micro and small entrepreneurial ecosystem it was the need of the hour to provide one stop solution to the problems relating to development and financing of these micro units.
As a Bank to be established by legislation under a new law, MUDRA Bank will refinance, register, regulate all small business financing institutions (MFIs), it will also partner with regional coordinators to enable them to boost up the Last Mile Financers monetarily. LMFs play a crucial role in micro financing and including them into the regulatory system will prove out to be potential game changer. On one hand LMF will utilise its local and regional knowledge, and of the borrowers potential and on the other hand the regulations will bind them with the framework set by the MUDRA Bank which will include registration, client protection to recovery options and it would helpcurb the exploitations by harsh money lenders in rural India.
Challenges in front of MUDRA Bank
To implement all these policies, a faster pace of implementation and execution is required. Paralysis in implementation of policies as well as awareness among the people running micro industrial units especially in rural areas are some of the major challenges confrontingMUDRA.Fortunately, the Modi government is working with a remarkable capacity which can be seen by the progress report of recently launched target based scheme for financial inclusion ‘Jan DhanYojana’ where the government included 665.26 lakh more people into the financial ambit of banking sector till January2015.
Point of Presence of LMFs in rural areas is a major hurdle in reaching out to the remotest part of the country and use of post offices as LMFs might turn into a landmark in financial inclusion of these micro units.
One Year old MUDRA
MUDRA turned one this April and as per the data provided on the website it has already disbursed more than one lakh crores rupees to nearly 24 lakh micro units. Not only have the existing micro units benefittedbut under the ‘Shishu’ category, many newcomers have availed of the concessional finance.
MUDRA- A Success
In his budget speech of 2016, finance minister ArunJaitley declared that the target for the last fiscal had been achieved. Till April 2016, a total of 106,52,867 loan applications worth Rs. 2437596 Crores had been sanctioned. The establishment of MUDRA would not only help in increasing access of finance to the hitherto unbanked but also bring down the cost of finance to the micro/small enterprises, most of which are in the informal sector.Further, the approach goes beyond credit only approach and offers a credit – plus solution for these myriad micro enterprises spread across the country.
On 4th April, 2016 Prime Minister Modi launched Standup India in line with MUDRA to fund the unfunded especially for the people from SC/ST and other deprived communities. This is in line with the vision of MUDRA, which is “to be an integrated financial and support services provider par excellence benchmarked with global best practices and standards for the bottom of the pyramid universe for their comprehensive economic and social development.”
The author is Research Fellow at India Foundation. The views expressed are his own.
(This article appeared in India Foundation Journal, May-June 2016 issue.)