MUDRA to Serve the Bottom of ‘Pyramid’

Dr Kshatrapati Shivaji, Chairman and Managing Director of Small Industries Development Bank of India
Dr Kshatrapati Shivaji, Chairman and Managing Director of Small Industries Development Bank of India

Nearly 5.77 crore small businesses in the country still remain underserved in terms of formal funding, and the government’s MUDRA plan is aimed at bridging that gap, says Dr Kshatrapati Shivaji, Chairman and Managing Director of Small Industries Development Bank of India (SIDBI), in an interaction with Kartik Sharma of Elets News Network (ENN)

Tell us about the government’s ambitious scheme of Pradhan Mantri Micro Units Development & Refinance Agency (MUDRA) Yojana.

The goal of Pradhan Mantri Micro Units Development & Refinance Agency (MUDRA) Yojana is to achieve a truly economically inclusive growth.

As per the National Sample Survey Office (NSSO) report of 2013, there are 5.77 crore small business units, mostly proprietorships, running small businesses, trading or service activities, 62 per cent of which belong to SC/ ST/OBC category entrepreneurs. These units have hardly any access to formal credit facilities. Most of these ‘own account enterprises’ (OAEs) form the bottom of the pyramid of Indian economy, which still remains unserved and underserved in terms of formal funding.

These OAEs affect the country’s economy immensely. They feed large local and international value chains as well as domestic consumer markets as suppliers, manufacturers, contractors, distributors, retailers and service providers. The estimated gross value addition of this sector s `6.28 lakh crore annually. But, support from the formal banking system to this sector is meagre.

Mainstreaming these OAEs will not only help in improving the life of these entrepreneurs, but also contribute substantially towards employment generation, thereby achieving higher GDP growth.

It was in this backdrop that the Union Budget 2015-16 announced setting up of MUDRA. The formal launch of MUDRA was done at the hands of Prime Minister Narendra Modi, on April 8, 2015. This agency will be responsible for the development and refinancing of all Last Mile Financing Institutions (LMFI) like Micro-finance Institutions (MFIs), which are in the business of lending to micro/small business entities engaged in manufacturing, trading and service activities, Societies, Trusts, Section-8 Companies, Co-operative Banks, small banks, scheduled commercial banks and regional rural banks. MUDRA will partner with state level/ regional level co-ordinators to provide finance to the ‘last mile financiers’ of small/ micro business enterprises. To begin with, MUDRA has started functioning as a subsidiary of SIDBI.

What will be the role of MUDRA in providing financial assistance to the ‘unfunded’ small entrepreneurs, who provide employment to a large number of people?

To start with, MUDRA would offer two basic categories of products, viz., refinance products for the micro units having loan requirements up to `10 lakh, and support to MFIs and LMFIs for on-lending. While, for the latter, MUDRA would start by lending to MFIs/NBFCs for creation of outreach, there is need for devising newer means of addressing larger outreach through intermediation, aggregation and franchisee mode, as may be considered suitable. MUDRA will work with the state level/regional level agencies to provide finance to end financiers of small/micro business enterprises.

Moving forward, MUDRA is also expected to lay down guidelines for registration of MFI entities, their supervision, accreditation and rating them, laying down responsible financing practices to ward off over-indebtedness and ensure proper client protection principles and methods of recovery, development of standardised set of covenants governing last-mile lending to micro enterprises, promoting right technology solutions for the last mile, formulating and running a Credit Guarantee Scheme for providing guarantees to the loans/portfolios being extended to micro enterprises, supporting development and promotional activities in the sector, and creating a good architecture of last-mile credit delivery for micro businesses.SIDBI

How will MUDRA help generate confidence among the small entrepreneurs, who have been prone to exploitation at the hands of money lenders so far?

As per the broad guidelines set up for MUDRA, a minimum of 60 per cent of support will flow to enterprises in the smallest segment. In addition, partner intermediaries of MUDRA are expected to encourage first-time entrepreneurs, youth entrepreneurs (aged up to 30 years) and women entrepreneurs, and design special schemes for such entrepreneurs. Further, emphasis shall be given to cash flow-based lending and not security-based one, thus avoiding any collateral security. The good news is that repayment obligations shall be flexible and framed keeping in view the business cash flow of the entrepreneur.

In future, MUDRA would attempt to offer innovative products like a pre-loaded MUDRA card offering a Portfolio Guarantee product, creation of resources for credit enhancement/ guarantee facility by way of a charge on the outstanding loans under refinance, lending through business/ banking correspondent model etc.

Since loaning will be done through all LMFIs, including MFIs, NBFCs, banks and Societies/Trusts, it will be possible for the small entrepreneurs to get the financial assistance without depending on informal sources.

What can be the challenges in proper implementation of MUDRA, and how will you overcome those?

The challenges faced by MUDRA would be the vastness of the area to be covered and the large number of beneficiaries to be reached. This would be addressed through forging proper collaborations with partner institutions, including the LMFIs. The two challenges faced by the sector are availability of credit and making it available to the very small enterprises at a reasonable cost. And these two challenges will be addressed suitably by MUDRA by evolving suitable products and funding mechanism.

MUDRA would offer two basic categories of products, viz., refinance products for the micro units having loan requirements up to `10 lakh, and support to Micro-finance Institutions

As per some estimates, size of the microfinance market, comprising the Self Help Group Bank linkage and microfinance institutions, is as large as `1.4-`2.5 lakh crore at penetration levels of 50-70 per cent and average ticket size of `35,000- `45,000 per household. With the announcement of upward revision in the eligible loan size and income levels under micro finance in the policy statement by the RBI on April 7, 2015, this market is expected to expand further. In addition, with economies of scale that is expected to accrue to the MFIs, reduction in operational cost of MFIs will also be seen. These will augur well for the sector and MUDRA.

MUDRA is poised to meet the expectations of the sector, thereby creating an inclusive economic architecture. There is a lot of expectation from MUDRA and so are the challenges. Let me assure that while addressing the immediate challenges, we shall devise systems and procedures, and suitable policies to overcome the challenges that MUDRA will come across in its newly started journey.

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