PM to launch MUDRA bank tomorrow; 58 million small units to benefit

Prime Minister Narendra Modi will launch the Micro Units Development and Refinance Agency (MUDRA) Bank, which will ensure 57.7 million small business units in the country access to institutional finance. MUDRA Bank will both provide credit to small entrepreneurs and act as a regulator for micro-finance institutions (MFIs).

Finance minister Arun Jaitley had, in the Union Budget for financial year 2015-16, proposed the creation of a Micro Units Development Refinance Agency (MUDRA) Bank, with a corpus of Rs20,000 crore, and credit guarantee corpus of Rs3,000 crore.

MUDRA, to be set up through a statutory enactment, would be responsible for developing and refinancing (through Pradhan Mantri MUDRA Yojana) all micro-finance institutions (MFIs) that are in the business of lending to micro / small business entities engaged in manufacturing, trading and service activities.

MUDRA will also partner state / regional level coordinators to provide finance to last mile financiers of small/micro business enterprises.

Further, the approach goes beyond credit only approach and offers a credit-plus solution for these enterprises spread across the country. MUDRA would, among other things:

  • Lay down policy guidelines for micro enterprise financing business;
  • Register MFI entities;
  • Give accreditation / rating for MFI entities;
  • Lay down responsible financing practices to ward off over indebtedness and ensure proper client protection principles and methods of recovery;
  • Develop guidelines on last mile lending to micro enterprises;
  • Promote right technology solutions for the last mile lending;
  • Formulate and run  a credit guarantee scheme for providing guarantees to the loans/portfolios that are being extended to micro enterprises;
  • Support development and promotional activities in the sector; and
  • Create a good architecture of last mile credit delivery to micro businesses under the scheme of Pradhan Mantri MUDRA Yojana.

MUDRA will mainly target mainstreaming young, educated or skilled workers and entrepreneurs, including women entrepreneurs, to enable development and inclusive growth.

According to the 2013 NSSO survey, there are some 57.7 million small business units, mostly individual proprietorship, which run manufacturing, trading or services activities.

These encompass myriad of small manufacturing units, shopkeepers, fruits / vegetable vendors, truck and taxi operators, food-service units, repair shops, machine operators, small industries, artisans, food processors, street vendors and many others.

Most of these 'own account enterprises' (OAE) are owned by people belonging to scheduled caste, scheduled tribe or other backward classes and these entrepreneurs are handicapped by lack of financial support.

Providing access to institutional finance to such micro/small business units/enterprises will not only help in improving the quality of life of these entrepreneurs but also turn them into strong instruments of GDP growth and employment generation, a finance ministry release stated.

MUDRA will primarily refinance loans to micro businesses / units under the aegis of the Pradhan Mantri MUDRA Yojana.

The initial products and schemes under this umbrella have already been created and the interventions have been grade 'Shishu', 'Kishor' and 'Tarun' to signify the stage of growth / development and funding needs of the beneficiary micro unit / entrepreneur as also provide a reference point for the next phase of graduation / growth for the entrepreneur:

  • Shishu: covers loans up to Rs50,000,
  • Kishor: covers loans above Rs50,000 and up to Rs5,00,000 and
  • Tarun: covers loans above Rs5,00,000 and up to Rs10,00,000.

Since the enactment for MUDRA is likely to take some time, it would, for the present, operate as a unit of SIDBI to benefit from SIDBI's initiatives and expertise.

The finance ministry, meanwhile, is planning to club the long-pending bill for regulation of micro-finance institutions with that of the MUDRA Bank.

''We are considering the proposal. Since the agency would already be a regulator, it makes sense to also give it statutory powers for the sector,'' said a person close to the development.

At present regulation of the micro-finance institutions (MFI) is split. The Reserve Bank of India regulates those MFIs which have registered themselves as companies. The regulations of other MFIs, which are essentially societies, are controversial turf because of which the RBI had suggested that those should be regulated through legislation by state governments.

Once the bill is cleared by Parliament as an Act the regulation of the entire sector would indirectly pass over to the finance ministry, which is at present only the implementing agency for the MUDRA Bank.

The passage of the MFI bill is a key element of the financial inclusion plan of the BJP-led government. One element of that is the opening of bank accounts under the Prime Minister's Jan Dhan Yojana is being steered by the RBI, while the MFIs will be controlled by the MUDRA Bank under the finance ministry.