While the launch of the MUDRA Bank is a laudable effort on the part of the government, there still persists ambiguity in the nature of the Bank's undertakings. The most pressing concern is in regards to the Bank's role as both a regulator and refinancing agency which will lead to a conflict of interests.
The Narendra Modi led BJP government has been criticised by many on its failure to deliver on its promise of 'change' through 'big bang' reforms. However, the majority fail to recognise the Prime Minister's attempt to break from the status quo by introducing 'big bang' reforms directed towards the long ignored small scale businesses and the informal sector. Small scale industries currently employ 460 million individuals, which accounts for 90 percent of the non-agricultural workforce. These enterprises have thus been a crutch in the growth of the economy and through appropriate institutional and statutory mechanisms, it has the potential to be the backbone of the Indian economy.
The government has proposed and launched numerous initiatives which focus solely on small scale enterprises. Recognising the national imperative of financial inclusion, the government introduced the Micro Units Development and Refinance Agency (MUDRA) Bank during the budget announcement of 2015-16. With only 4 percent of micro, small and medium enterprises (MSMEs) falling within the purview of the Indian banking system, the Bank has been launched with the aim of funding the unfunded across the country.
Traditionally, small entrepreneurs have borrowed from unregulated financial agencies primarily moneylenders making them a victim of high interest rates. As an alternative, loans are availed from micro-finance institutions (MFIs) as well. In the last few years however, interest rates charged by even MFIs have soared. Exorbitant interest rates of 15-16 percent per month have been charged, thus increasing the financial burden borne by entrepreneurs. The MUDRA in its refinancing capacity will provide finance to banks and other institutions such as MFIs at 7 percent. Although the interest charged to the end borrower will vary depending on the risk margin of respective institutions, it will help push down the average interest rate significantly. The unreasonable collateral demands further add to the woes of small enterprises. The credit guarantee corpus of 3,000 crore rupees will help bolster the entrepreneurial spirit and ambition of small businesses.
A unique product offered by the MUDRA Bank is the provision of loans focused on the different stages of growth and development of a MSME. Previously, various loan incentives have been either directed at promoting a particular industry or a particular product. As a MSME grows it needs to evolve by improving its branding and marketing, and by investing in technological upgradation. These initiatives will make the enterprise more profitable and competitive. The loan scheme of the MUDRA ranges from fifty thousand rupees to 10 lakh rupees aiming at the three stages of development of a business- shishu, kishor and tarun.
The other area of responsibility of the MUDRA Bank is more challenging and extensive as it aims to register and regulate MFIs. First, the government will have to initiate the tedious task of registering over a thousand MFIs, which are spread across the country. The administrative capabilities of the government will surely be tested during this endeavour. Second, the regulation of MFIs has been a subject of debate over the years. Currently, MFIs registered as non-banking finance companies (NBFCs) hold self-regulation status. One the one hand, due to minimal regulation there have been accounts of coercion of borrowers for repayment of loans, short repayment cycles and high interest rates while on the other, the over-regulation of MFIs resulted in the Andhra Pradesh crisis of 2010. With strict curtailment on door to door loan recovery by MFIs, recovery rates in the state plummeted causing the closure and downsizing of several MFIs. The immediate effect was the increase in the cost of borrowings by 60 percent leading to a reliance on unregulated financial agencies again. It is thereby essential for the MUDRA to draw the line between no regulation and over-regulation so as to provide entrepreneurs with a suitable credit source.
While the launch of the MUDRA Bank is a laudable effort on the part of the government, there still persists ambiguity in the nature of the Bank's undertakings. The most pressing concern is in regards to the Bank's role as both a regulator and refinancing agency which will lead to a conflict of interests. During the launch of the Bank, the topic of introducing a MUDRA Bill with elements of the MFI Bill of 2012 was touched upon. MFIs have been vocal about their apprehensions regarding the Bank and believe that the conflict of interests could replicate the MFI crisis of 2010 at a national level. Thus, the effectiveness of the Bank will be determined once it gains its proposed statutory powers on the passing of the MUDRA Bill in parliament.
Efforts have also been made to address issues that impede the operations of small scale businesses on a daily basis. A large number of MSMEs are reliant on electricity as their main source of power. The erratic power supply to these enterprises severely hamper their production capabilities. The brunt is borne by both large and small enterprises. Large enterprises compensate through the use of diesel operated generators which increase their operating costs; small enterprise cannot afford the high cost of diesel due to which their production is halted during periods of power cuts. The Deen Dayal Upadhyaya Gram Jyoti Yojana with its promise of 24x7 power supply, hopes to spark the production capacity of small scale enterprises. It aims to not only increase power supply but also assures reasonable power tariffs through metered consumption.
Besides schemes being introduced for the overall growth and development of the MSME sector, initiatives have been launched which focus solely on entrepreneurs. The accidental insurance, life insurance and pension schemes will contribute to the well-being of the individuals engaged in small scale industries which will positively affect the progress of the economy as a whole.
India stands at the threshold of becoming an economic superpower with a huge demographic dividend to capitalise on. The small scale industries which forms the foundation of the economic strata need to be strengthened and supported. The numerous initiatives introduced in the past few years are a step in the right direction. Further appropriate avenues need to be recognised so as to simultaneously achieve equitable and sustainable economic growth.
(The writer is a Research Intern at Observer Research Foundation, Delhi)
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