MUDRA Bank – “Funding The Unfunded”

Micro Units Development and Refinance Agency Bank (or MUDRA Bank), a public sector financial institution of India is launched by Prime Minister Narendra Modi on 8^th April 2015 under the Pradhan Mantri Jan Dhan Yojana for funding the unfunded small entrepreneurs.

The Main Objectives of Mudra Bank are, to encourage entrepreneurs and small business units to expand their capabilities and operations, to reduce over indebtedness and to provide formal system of credit (finance). Agriculture & Self-employment will be the focus areas of MUDRA Bank.

Reason for establishing Mudra Bank?

MFIs do not meet the funding requirements of small entrepreneurs who want more than Rs.50,000 and up to a few lakhs. Commercial banks, too, are reluctant to have business relationships with this segment of borrowers. There are 57.7 million small business units and only 4% of them are able to access institutional finance. How does one solve the funding gap?

This very reason led to the establishment of MUDRA Bank.

MUDRA Bank in Detail

v MUDRA targets young, educated or skilled workers and entrepreneurs including /women entrepreneurs

There are about 5.77 crore small business units. MUDRA Bank lays down "responsible financing practices" to ward off over indebtedness and ensure proper client protection principles and methods of recovery, besides development of standardized set of covenants governing last mile lending to micro enterprises.

"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," the Finance Ministry said in a statement.

v MUDRA Bank to have a corpus of Rs 20,000 crore

In his Budget speech, Finance Minister Arun Jaitley had proposed the MUDRA Bank will have a corpus of Rs 20,000 crore, and credit guarantee corpus of Rs 3,000 crore.

The Bank will nurture small businesses through different stages of growth and development of businesses termed as Shishu, Kishor and Tarun.

ü Shishu: This is the first step when the business is starting up. The loan cover in this stage will be upto Rs 50,000.

ü Kishor: In this stage, the entrepreneur will be eligible for a loan ranging from Rs 50,000 to Rs 5 lakh.

ü Tarun: This last and final category will provide loans for upto Rs 10 lakh.

v The roles envisaged for MUDRA include the following:

ü Laying down policy guidelines for micro enterprise financing business.

ü Registration of MFI entities.

ü Accreditation /rating of MFI entities.

ü Laying down responsible financing practices to ward off over indebtedness and ensure proper client protection principles and methods of recovery.

ü Development of standardized set of covenants governing last mile lending to micro enterprises.

ü Promoting right technology solutions for the last mile.

ü Formulating and running a Credit Guarantee scheme for providing guarantees to the loans/portfolios which are being extended to micro enterprises.

ü Support development & promotional activities in the sector.

ü Creating a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of Pradhan Mantri MUDRA Yojana.

ü MUDRA would also partner with state/regional level coordinators to provide finance to "Last Mile Financiers" of small/micro business enterprises.

v Beauty parlours, hawkers to be covered by MUDRA Bank

Businesses/entrepreneurs/units covered by the MUDRA Bank would include proprietorship/partnership firms such as small manufacturing units, shopkeepers, fruits/vegetable sellers, hair cutting saloon, beauty parlours, transporters, truck operators, hawkers, co-operatives or body of individuals, food service units, repair shops, machine operators, small industries, artisans, food processors, self help groups, professionals and service providers etc. in rural and urban areas with financing requirements up to Rs 10 lakh.

v Credit Plus Approach

MUDRA will also take up other initiatives such as supporting financial literacy, creating a framework for “Small Business Finance Entities” where it will work with credit bureaus and rating agencies among others.