On 8th April 2015, Modi government decided to junk the report of the Committee that it had set up after last year’s budget, and announced
the setting up of MUDRA (Micro Units Development Refinance Agency) Bank as the
single regulator and refinancer for all types of entities in the microfinance
space. This step has been hailed as a potential game changer which will bring
urgently needed funding to the fund-starved “unincorporated micro-business
sector”, integrate the large non-formal sector and the last mile financiers
(LMFs) with the formal economy, and usher in a new era of “inclusive” growth.
This is an innovative idea whose time has finally arrived. It
not only represents the recognition by the Indian state of the important role played by micro and small
enterprises but also represents recognition
of the fact that it is only the grass root institutions with local knowledge
and expertise that can ensure profitable and recoverable lending to these micro
and small enterprises. By setting up the MUDRA Bank, which in a way is also a
reversal of the long trend of anti-microfinance mindset in the government
(particularly since the SKS episode in 2011 but much older), the government aims
to formalize the largely non-formal LMFs and put in place a robust and
effective framework for credit delivery to micro and small enterprises and
integrating them in the formal economy. This is expected to lead the country to
a virtuous cycle of growth, job-creation and prosperity by harnessing the
pent-up entrepreneurial potential.
MUDRA Mandate
MUDRA Bank is expected to play the following roles:
Regulation and Supervision
·
MUDRA Bank would be the sole
regulator for all players in the Micro-Finance Institutions (MFI) sectorand
apex-level supervisor, thereby bringing uniformity in regulations for the SHG-Bank
linkage programme, NBFC-MFIs, and trusts/societies/not for profit NBFCs/chit-funds/nidhis/Section
25 companies engaged in MFI activities
Registration
·
Facilitating registration of
MFI entities.
Policy Framework
·
Preparing policy guidelines,
architecture and standard covenants for micro or small enterprise financing
including Last Mile Credit Delivery.
·
Laying down responsible
financing practices and ensure adoption by all lenders,
prevent issues of overleveraging of borrowers,
ameliorate indebtedness among the poor, ensuring robust and equitable client
protection policies and modes of recovery.
Credit Rating
·
Accreditation/rating of MFI
entities would not only encourage the adoption of best practices across the
industry
Funding and Liquidity
·
Increase liquidity support
to MFIs and reduce cost of funds for MFIs
Expansion in Outreach
·
Partnership with state level
/regional level coordinators for a focused approach in increasing access to
financial services in under-served areas
Credit Guarantee
·
Formulating and managing a
Credit Guarantee Scheme for extending guarantees for loans to micro enterprises
for risk mitigation which will encourage lenders to take higher exposures
Technology
·
Promoting technological
solutions for efficiency and reach.
Resources for MUDRA
MUDRA Bank has been allocated a corpus of Rs. 20000 cr (made
available from shortfalls of priority sector lending) which will be used for
creating refinance facility for this segment. This will be a low cost fund
which should, in course of time, lower the overall cost of fund. In addition,
MUDRA has also been allocated a corpus of Rs. 3000 cr for Credit Guarantee
Scheme as a risk mitigation mechanism for this segment.
As estimated by ICRA, in two years time, the MFI sector(including
SHGs and NBFC-MFIs) would have a loan portfolio in excess of Rs. 100000 cr
(currently Rs.78000 cr), of which a significant proportion would be refinanced
by MUDRA Bank. Even with a leverage of 4-5, the Rs. 20000 cr allocated to MUDRA
Bank can easily do a business of this quantum. The access to low-cost priority
sector funds is likely to reduce the average cost of funding from the median
14% (range 12-16%) at present by a whopping 100-400 basis points, the benefits
of which will surely reach the micro-enterprises too. This is going to have a
major impact in bringing about financial inclusion.
The Un-incorporated Sector in India: The Better Half
Prof. R Vaidyanathan of IIM Bangalore, who is credited to be the originator of many of the ideas that form the
basis for MUDRA Bank, observes, “For the first time in our economic history, a
government has thought for the segment that accounts for more than 50% of our economic activity instead of
the five percent represented by the Sensex companies”( http://www.rediff.com/business/column/column-vaidyanathan-why-mudra-bank-is-a-major-landmark-in-our-growth-process/20150324.htm?sc_cid=twshare).
The dominant role played by micro and small
enterprises in Indian economy was first brought to the attention of the "economic intelligentsia" and the policymakers by Credit Suisse Asia Pacific Equity
Division in July 2013 by its report entitled “India’s Better Half: the Informal Economy”.
The report affirmed that 90% of the jobs and 50% of the GDP in India originated in the non-formal sector and the entire private Corporate
sector only contributed 15% to the GDP with the listed companies’ (8000 in
number) contribution being only a measly 5%. It is clear from the report that the
non-formal sector is the head and the formal sector is the tail of the Indian
economy, but strangely, in India, it has always been the tail that has been
wagging the dog.
Following are some of the strange but nevertheless true facts about Indian
economy:
- · The non-formal sector (consisting of 5.78 cr micro and small enterprises) provides employment to 12.8 cr people. This doesn’t include jobs in the construction sector and the rest of the unorganized sector. The entire unorganized sector put together provides over 46 cr jobs. On the other hand, the entire private Corporate sector put together provides only 2.96 cr jobs, with annual job creation of only 1 lac every year since 1991, the year when reforms were launched. (NSSO Economic Census 2014)
- · The total asset base of the 5.78 cr micro and small businesses is Rs. 11.4 lac cr with annual value addition of Rs. 6.28 cr which comes to 55 %. In contrast the private Corporate sector has a value add of only 34 %. This shows who is more efficient. (Reserve Bank of India)
- · While Corporate sector pays 10-14 % interest, many of the micro and small enterprises pay 2-10% per month and yet manage to add around 62 % more value on their assets. Despite this, the corporate sector and its supportive media keeps up its clamour for further reducing interest rates (which will only come at the cost of small depositors).
- · These micro and small enterprises are owned largely (almost 2/3rd) by Scheduled Castes, Scheduled tribes and OBCs with more than half of these being in the rural areas.
- · Corporate sector has managed to get Rs. 50 lac cr through banking sector, FDI and FII investments since 1991. On the other hand, only 4% of the total asset base of non-formal sector (Rs. 46000 cr out of Rs. 11.5 lac crore) is funded by the formal sector of economy. (NSSO Economic Census 2014)
- · The non-formal sector had around 60% share in the credit disbursed by commercial banks in 1991 which has come down to around 30 % now with the reduction in below Rs. 10 lac loan figure being alarming. In contrast, the private Corporate sector constituting 12 % of the GDP corners 40% of bank credit. (Reserve Bank of India)
- · According to estimates, only 4 % of the 5.78 cr micro and small enterprises have access to institutional finance, with the gap between loan demand and supply being Rs. 30 lac cr.
Indian economy presents a striking paradox. On the one hand we have the banking sector which is flush with money
without any takers unless it reduces interest rates, and on the other hand we
have the highly efficient but fund-starved sector of micro and small
enterprises paying from 24% to 120 % per annum. The setting up of MUDRA
Bank has to be seen in this context.
The Battle of Economic
Theories
The concept behind MUDRA
Bank also represents an important stage in the ongoing battle between different
economic theories. On the one hand we have the largely unknown 1930s Soviet-era
economist Alexander Chayanov (known for his “consumption-labour-balance”
principle) who is taking on the combined might of both Adam Smith and Karl
Marx. Chayanov, who had postulated the efficiency of family farming and family
economics over both large Soviet style cooperatives and capitalist production
system, is also turning out to be correct in the case of family owned
businesses. He opposed the view of Marx and held that a working family was
neither capitalist nor proletariat and was executed on 3.10.1937 for his views.
The performance of micro and small businesses in India is a vindication of the
views of this rediscovered economist.
The economic intelligentsia in
India which had been waiting for the demise of micro and small enterprise
sector for a long time (and even had been assisting in this process by slowly stifling
the NBFC sector) had to finally bow its head before the winds of change and
acquiesce to the setting up of the MUDRA Bank.
Caveat
It has rightly been said that many great ideas have met their nemesis
at the altar of execution. This is more so in the case of our country which has
turned into a graveyard of many promising concepts and projects. So we will
have to wait and see how this great idea is implemented. God is in the detail.
- Apart from the implementation issues, there are other inherent dangers too about which the MUDRA Bank has to be careful:
- There is a built-in conflict of interest arising from the MUDRA Bank taking on multiple roles including refinancing agency as well as the regulator.
- The sector in which MUDRA Bank is going to operate has traditionally been considered a high risk sector. However, it is also true that risk measurement tools and methodology itself has been suspect. But the Bank will need to be circumspect when formulating policies.
- The Bank will also have to be on its guard against the growth of shadow banking in its domain.
Published in Current Affairs Survey, June 2015
No comments:
Post a Comment