If small is to be beautiful

The proposal to establish the Micro Units Development Refinance Agency (Mudra) Bank to provide credit at reasonable cost to small business units is in consonance with the Centre’s larger game-plan of financial inclusion for all. Basic access to the weaker sections, by way of a savings bank account, has been delivered through the Pradhan Mantri Jan Dhan Yojana. The next piece — ensuring transactions in these accounts — will hopefully be met by channelling Central and State subsidies into these accounts as direct benefit transfers. But financial inclusion does not end with this. Providing credit at reasonable cost to those who have no access to it is a critical part of any inclusion initiative and the Mudra Bank, by funnelling credit to long-neglected micro and small businesses, seeks to plug this gap. The proposal recognises that micro enterprises from the informal sector are key engines of economic growth. According to the Sixth Economic Census, there are 5.8 crore small businesses that employ about 12.8 crore people. Also, the informal sector accounts for more than 90 per cent of the workforce and about 50 per cent of the country’s GDP.

But delivering credit entails a cost, whether in setting up extensive branch networks in rural areas or mitigating the high risk attached to small-ticket loans. Delivering last-mile credit to small borrowers has proven a difficult task for Indian banks as they lack the bandwidth and the skills to evaluate such borrowers. But microfinance institutions focus on certain regions and have about three crore clients countrywide. According to MFIN (Microfinance Institutions Network), the gross loan portfolio for MFIs stands at about ₹31,000 crore today. Against this backdrop, the initial corpus of ₹20,000 crore for the Mudra Bank to help refinance a chunk of this loan portfolio may make a significant impact on the sector. MFIs currently source over three-fourths of their fund base from banks and other financial institutions at steep borrowing costs. If they can receive funds from Mudra Bank at lower costs, the ultimate beneficiaries will have access to cheaper loans too.

But the framework of the proposed Mudra Bank needs more clarity. Reports suggest that aside from refinancing, the bank will also regulate small financial institutions. What this means for the RBI’s job of regulating all lending institutions is not clear. Also, given that there are already refinance institutions such as Nabard and Sidbi, it will be imperative that the Mudra Bank ensures more efficient use of capital. Rather than directly refinancing, it will help if it acts as market maker to further the dissemination of capital. Providing guarantees to bond and loan issues and securitising loans to MFIs will raise more liquidity for the sector. The Mudra Bank must not be allowed to end up a mere presence like other refinance institutions — with little to show in terms of lending.

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