Critical Analysis: How Can MUDRA Bank Make a Difference to the Economy?

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.