MUDRA BANK
Micro Units Development and Refinance Agency – MUDRA. Yes that is what it means.
The Finance Minister announced that an entity by the name MUDRA Bank would be set up with a capital of Rs.20000 crores. The primary purpose of this entity would be to regulate and refinance all micro-finance institutions. This would be another good structural development for the Indian Financial ecosystem. MUDRA is touted to be similar to National Housing Bank (NHB), which currently is the apex regulator for all Housing Finance Companies. In addition to the capital of Rs.20000 crores, there would be a credit guarantee corpus of Rs.3000 crores.
To be set up through a statutory enactment, MUDRA 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 service activities. So in this role, this entity would lay down policy guidelines for micro and small enterprise financing businesses, registration / licensing of MFIs accreditation / rating of MFIs, stipulating best financing practices to protect against reckless lending and borrowing, while at the same time ensuring client protection and monitoring different methods of recovery used by MFIs. What also is somewhat intriguing is that this entity would prioritise lending to enterprises run by SC / ST communities. In addition to this exclusive Bank for MFIs, a minimum limit of 7.5% under Priority Sector Lending is being prescribed for MFIs.
Various estimates place the number of MSMEs in India around 60 million. The FM calls these “own account enterprises” in which he has classified outfits ranging from Kirana stores to units repairing various appliances. Based on an NSSO survey, on an average these units employ two people (including the owner) and have an average of Rs.2 lacs of fixed assets. These units are more or less equally distributed across manufacturing services and trading businesses. This move should prove helpful to them, provided this is implemented in the spirit it is intended for. There are some comments about this segment being completely unbanked. However there have been attempts in various parts of the country, by small and mid-sized NBFCs to reach out to this segment. It would be rather closer to truth to say that the model of lending to this segment has already been done and tested to some extent by these NBFCs. While not to take away the credit from government in establishing MUDRA with a social objective of developing MSMEs and MFIs, this can be a wonderfully profitable entity as well.
It would be interesting to see MUDRA come up and take shape. If run well, it would be a win-win for all concerned.
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Sitaraman is an expert in Risk Management with over 23 years of experience in the lending industry. He has written a thought provoking book, a thriller fiction - The Whistleblowers (Published by Westland Ltd.). The book gives inside insights to a layman on how Risk Management works in a lending organisation and also helps the reader to the right things while putting all his / her savings in buying a property. Click here for more details of the book – The Whistleblowers.
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