Various Perspectives: Mudra Bank

Micro Units Development and Refinance Agency (MUDRA) Ltd. Bank was launched on 8 April, 2015 as a subsidiary of SIDBI. It has been registered as an NBFC with the Reserve Bank and within a year, the government intends to come out with a legislation to convert the NBFC into a bank.

The aim MUDRA is to finance the Non – Corporate Small Business Sector (NCSBS), thus encouraging entrepreneurs and small business units to expand their capabilities and operations, to reduce over indebtedness and to provide formal system of credit

This Bank would be responsible for regulating and refinancing all Micro-finance Institutions (MFI) which are in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities. The Bank would partner with state level/regional level coordinators to provide finance to Last Mile Financer of small/micro business enterprises.

A sum of Rs 20,000 crores would be allocated to the  MUDRA Bank from the money available from shortfalls of Priority Sector Lending for creating a Refinance Fund to provide refinance to the Last Mile Financers. Another Rs 3,000 crore would be provided to the MUDRA Bank from the budget to create a Credit Guarantee corpus for guaranteeing loans being provided to the micro enterprises.

Primary Duties

The MUDRA Bank would primarily be responsible for –

• Laying down policy guidelines for micro/small enterprise financing business
• Registration of MFI entities
• Regulation of MFI entities
• Accreditation /rating of MFI entities
• Laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery
• Development of standardized set of covenants governing last mile lending to micro/small enterprises
• Promoting right technology solutions for the last mile
• Formulating and running  a Credit Guarantee scheme for providing guarantees to the loans which are being extended to micro enterprises
• Creating  a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of Pradhan Mantri Mudra Yojana

Funding based on Stages of Growth of a Micro unit

MUDRA has classified the borrowers into three segments: the starters, the mid-stage finance seekers and the next level growth seekers. To address the three segments, it has launched three loan instruments:

• Under ‘Shishu’ Scheme, loans up to Rs 50,000 will be sanctioned. This is the first stage when the Under ‘Shishu’ Scheme, loans up to Rs 50,000 will be sanctioned. This is the first stage when the business is just starting up.
• Under ‘Kishor’ Scheme, loans above Rs 50,000 and up to Rs 5 Lakh will be provided.
• Under ‘Tarun’ category, loan of above Rs 5 Lakh and up to Rs 10 Lakh will be sanctioned.

Mudra Bank has a number of roles and responsibilities. Apart from the primary responsibility to finance the Non – Corporate Small Business Sector (NCSBS), it also has to refinance the MFI’s; setting down policies and guidelines for MFIs, and regulating and rating MFIs. Thus, in the form of MUDRA, we have one institution that is in charge of both lending and regulating the micro lending industry. This might bring a conflict of interest at a later stage in terms of functioning as well as governance, that may not prove effective.

Mudra Bank versus regulation of micro-finance

There are several types of NBFCs in India. NBFC-MFI is one of these types under which MUDRA has been kept as of now. NBFC-MFIs, which have 95% market share, are regulated by RBI. The other MFIs registered under various society acts (such as NGO-MFIs) are no under strict regulatory supervision. IN MUDRA, the government sees a unified regulator for MFIs. The government was planning to merge the MUDRA bill and Microfinance Institutions (Development and Regulation) Bill. The idea is to establish MUDRA as an overarching regulator for the microfinance sector. The Microfinance industry however wants RBI to continue regulating MFIs that are registered as non-banking financial companies (NBFCs) especially when industry has just settled down after the Andhra Pradesh crisis where some MFIs had been charged with practice of charging high interest rates driving their lenders to suicide at times. So, the industry has expressed concerns regarding change in the regulatory architecture.

Financial Challenges

As of now, the shortfalls in the PSL targets of the domestic scheduled commercial banks are to be deposited in the Rural Infrastructure Development Fund (RIDF) managed by NABARD. This money would now be shared with Refinance Fund managed by Mudra Bank.  A look at the overall achievement of the priority sector targets of the banks indicates that domestic banks have been surpassing the targets in all years, starting 2002, except for the last three years, when there was a marginal shortfall. However, banks have been falling short of the specific targets for agricultural lending. The shortfalls in achievement of foreign banks are to be invested in the Small Enterprises Development Fund managed by Small Industries Development Bank of India (Sidbi). Foreign banks have been having issues in achieving the targets, but given their overall book size, this amount does not add up to much. So critics argue that if Mudra Bank is to be funded through non-budgetary support in the mechanism outlined by the finance minister, it is surely financially challenged from inception.

Yet another refinancing agency?

Another question raised is whether there is need for yet another agency refinancing agency. In the current structure of financial intermediaries, there are a few refinancing agencies already engaged in funding small units, even though their success rate in achieving the mandate is debatable. These include NABARD and SIDBI.

• NABARD (National Bank for Agriculture and Rural Development) was set up in July 1982. Its aim was to make available credit support and services to the rural and farming segment of the country and also encouraging fair growth which is also sustainable.
• SIDBI was another refinancing agency which was set up in April 1990. It is the acronym for Small Industries Development Bank of India. The main goal of SIDBI was to lend money to the small and medium business as well as their development and promotion.

These refinancing agencies were not successful in fulfilling their objectives. As such, the benefits of creating a new agency instead of focusing the resources on restructuring the already existing agencies are not clear. Instead of creating the new agency, it could be better to energize the exiting agencies by restructuring and broadening their scope.

Promotion of Shadow Banking?

Mudra bank seems to be promoting shadow banking as its operations are not under the administration and regulation of Reserve Bank of India (RBI).  Shadow banking is globally discouraged as it is considered one of the flaws of the current financial system which leads to global crisis. As such, there is a chance of potential operational risk when Mudra Bank grows in size.

According to the NSSO survey of 2013, there are 5.77 crore small business units, mostly individual proprietorships, which run small manufacturing, trading or services activities. Most of these ‘own account enterprises’ are owned by people belonging to Scheduled Caste, Scheduled Tribe or Other Backward Classes. However, only 4% of such units get institutional finance. Therefore, they never had access to insurance, credit, loans and other financial instruments to help them establish and grow their micro businesses, thus, excluded from the benefits of formal banking system. So, most individuals depend on local money lenders for credit. The loan comes at high interest and often with unbearable conditions, which make these poor unsuspecting people fall in a debt-trap for generations. When businesses fail, the borrowers become vulnerable to the lender’s strong-arm tactics and other forms of humiliation. Now with MUDRA Bank providing access to institutional finance to such micro/small business units would turn them into strong instrument of GDP growth and also employment.

Moreover, today India is moving towards manufacturing sector and it is the MSMEs who will contribute a major part in the growth. But Banks are averse in granting loans to them. This is because banks feel that SMEs are vulnerable to market risks and do not have possessions that can be used as guarantee. Further, banks are unable to figure out whether SMEs have the technical, professional and marketing expertise to generate adequate revenue to service loans.

• MUDRA Bank will help aspiring entrepreneurs in India by providing funds to MSMEs through refinancing. And at times when SMEs and entrepreneurs are not able to repay loans or need further assistance to make their businesses scalable, MUDRA Bank will get involved and help these MFIs to get further credit through refinancing, and in turn help SMEs with more funds.
• Rating of MFIs is an important step as it will give SMEs a variety of options before choosing their creditors that provide them the best interest rate.
• MUDRA Bank will give SMEs the much needed impetus to effectively manage and grow their businesses and not let them fall prey to the vicious circle of hefty interests and loan repayments.

Further, MFIs are primarily dependent on commercial banks for money and resources are not cheap. Banks are required to channel 40% of their loans to the so-called priority sector, consisting of agriculture and other small loans, and typically they give money to MFIs to meet such targets. The MFIs get such loans at 13-14% and lend them at 23-24%, keeping a 10% margin to take care of their operating cost and profit. Mudra Bank is expected to offer refinance at a much cheaper rate and to that extent the cost of money will come down for small borrowers.

Small businesses in India are major source of employment, providing jobs to nearly 120 million people. If given proper access to funding and a chance to expand, they can create more job opportunities. Therefore, Mudra Bank has the potential to change the face of economy.