MUDRA Bank conceptualised in Budget 2015-16 for “funding the unfunded”, the 5.8 crore small and micro businesses, which provide 12.8 cr jobs, took birth in just five weeks on April 8-- at breakneck speed. The MUDRA initiative does not just wear the Prime Minister’s label. It is driven by Prime Minister Narendra Modi himself.
His intense urge to provide funds to the credit-staved millions of small entrepreneurs is self-evident from his passionate speech at the Mudra inauguration. He did not mince words when he told the nation that the corporate sector, which attracts a lot of media attention and huge funds, provides only 1.25 cr jobs. He tellingly pointed out that the small and micro units, which provide 10 times more jobs, get very little policy attention and just 4 per cent of their credit needs from the organised banking system and that for the balance 96 per cent they are at the mercy of usurious moneylenders, who charge extortionate interest.
He admitted that the glaring facts brought to his notice led to the MUDRA idea. He emphasised that small borrowers repay loans promptly because of their saving habit. He also recalled how he got the kite business mainly run by Muslims in Gujarat studied in the early 2000s and addressed their credit and supply-side issues, which resulted in the business going up from Rs 15cr to Rs 500 cr in a decade.
Thanks to Modi’s intense commitment, the Mudra Bank has become a functioning reality in an unbelievably short time. Also, Modi seems to be on the dot in his understanding of the impulses of national economy.
The structure of the Indian economy brings out the fact that corporates are not the main players in the economy. This is self-evident from published data. Yet, it is carefully avoided in the mainline economic discourse. The Credit Suisse Asia Equity division pointed out in its study [July 2013] that the corporate sector, which accounts for just 15per cent of India’s GDP and only 10per cent of the jobs, is just the tail of the national economy which “cannot wag the dog”.
It said that 90 per cent of the jobs and 50per cent of India’s GDP come from the non-corporate or informal sector. It also called the bluff of judging the Indian economy through the response of corporates.
The Economic Census 2014 pointed out that only 4per cent of the credit needs of 58 million small and micro business is provided by the banking system. It reported that they produced a value addition of Rs 6.28 lakh crore on gross fixed assets of Rs 11.4 lakh crore-- namely 55 per cent after paying usurious rates of interest. But the RBI data suggests that the value addition by corporates is just 36 per cent of the gross fixed assets -- almost 20 per cent less.
The Credit Suisse report also found that while the informal sector in the West is normally illegal sector, in India the huge informal sector exists because the state has not been able to reach them. That is why they remain outside the organised economy.
The Economist magazine [Sept 2013] suggested that the only way of organising the unorganised millions of small and micro units is to provide organised finance to them.
The MUDRA yojana is an endeavour to give a policy orientation to the largest and yet neglected segment of the national economy to bring it within the orbit of organised economy. This is as much a short-term and medium initiative with huge long-term impact. But the issue is how the MUDRA Bank works and its reach can be scaled up to meet the monumental challenge to reach almost 6 crore small and micro businesses.
More importantly, almost two-thirds of these are run by the Scheduled Castes, Scheduled Tribes and Other Backward Castes and more than half of them in the rural areas-- where both geographically and demographically economic delivery is lagging behind. But the concept of MUDRA seems tweaked to scale up its reach.
Mudra is not a bank but a refinance institution. It will register and regulate national and state level main lenders, who will register small Last Mile Financiers [LMFs] -- ranging from post offices to local financiers, who are already lending to small businesses-- and refinance them. This is an innovative idea with no precedent anywhere-- India-centric concept based on the theme of Niti Aayog to adopt “what works in and for India”.
The inclusion of the local LMFs is a game changer. It is based on the realisation that local knowledge is the primary requisite for successful and recoverable lending to micro units. The LMFs alone can have knowledge of the borrowers’ character and worth which formal credit institutions lack. MUDRA therefore seeks to integrate the non-formal LMFs to deliver formal credit to micro businesses.
MUDRA will lay down normative guidelines for engaging the LMFs. MUDRA is an innovative and also an ingenious idea. If the LMFs, which now borrow money at high cost and lends at high cost to micro businesses, is refinanced at lower rates, the ultimate interest rate for micro businesses would be far lower. This is how MUDRA structure seeks to integrate the hundreds of thousands of informal financiers into the formal modern financing system. MUDRA seeks to fertilise the bottom of the pyramid of the economy.
Given Modi’s capacity to scale up performance like how he has done in the Prime Minister’s Jan Dhan Yojana, which has fetched Rs 14 cr bank account, the innovative MUDRA idea has the potential to be a game changer.