How MUDRA Bank is helping Small Businesses

MUDRA Bank was launched in April 2015 by the Prime Minister of India. The initial corpus for refinancing was set at Rs.20,000 crore and the initial refinancing rate was 6.7%. The corpus is to be used for over 4 years. MUDRA is a subsidiary of Small Industries Development Bank of India. Governments has approved setting up the credit guarantee funds against MUDRA loans budgeting for a credit of Rs.1,00,000 crore under the three types of loans that is being offered. The loans offered are Shishu loans, Kishor loans and Tarun loans.

MUDRA refinances the bank and MFIs and NBFCs for loans they extend under the schemes offered by MUDRA Bank. The government owned banks were given a target to disburse loans with the target of Rs.1,22,000 crore. But they have only managed to approve lending of Rs.72,000 till mid-January, 2016. Though the targets haven’t met, the approval figures will end by the time the financial year ends.

Of all the categories of loans, Shishu category has the highest share of approvals at 40% and Kishor and Tarun each have approximately 30% approval rating. The financial institutions that have availed the refinance to the maximum extent are Bank of Maharashtra, Indian Overseas Bank and State Bank of Travancore. MFIs are also active at seeking refinance. Though there is a relatively low credit growth, the need for refinance is not felt.

MUDRA Loan scheme has been availed by around 1.7 crore borrowers. MUDRA’s only hurdle is to convince the credit officer that the borrower should be lent the money. MUDRA aims to ease the pain of the borrowers. Most often borrowers are asked to take a life insurance and make the bank the beneficiary to cover the mortality risk but with the MUDRA’s refinancing scheme, the requirement to take a life insurance is gone. The borrower can make withdrawals and repayments on a daily basis and the lenders are instructed to calculate the interest accordingly. This makes the process simpler for the real small borrowers. Those who want to set up a small business but couldn’t mainly because of the credit limitations can now think about setting up a business by taking a MUDRA loan.

The drawback of this scheme is that the bank officers are disbursing the loan to their relatives or unworthy recipients. There isn’t any effective check that can be place and the credit decision resides with the individual banks. We will know in the 2017-18 Union Budget if MUDRA is a game changer. As long as the loans of 2015-16 are repaid, the lending process should improve over time.