Small businesses contribute tremendously to the economy and are often termed as engines of job creation. Small sector is estimated to account for 20 percent of economic output and 40 percent of India’s exports. Small entrepreneurs account for a huge chunk of 12 crore people of the workforce in India. It becomes imperative for the government to support and provide the necessary resources to help them grow and sustain themselves. With this perspective, the government of India has provided various opportunities through its ministries, bodies and programmes. In spite of various schemes and initiatives in this direction, millions of common men and women in our country, who run small businesses, have almost remained outside the net of formal institutional finance and have difficulty in getting credit from established banks[2].

Another initiative towards providing financial support for development of small enterprises is MUDRA Bank. The Prime Minister Narendra Modi launched the promised Micro Units Development and Refinance Agency Ltd (MUDRA) Bank on 8 April, 2015 with a corpus of Rs 20,000 crore and a credit guarantee corpus of Rs 3,000 crore to regulate micro-finance institutions, to promote their growth, add to the country's output and create jobs [1,2].

The initiative mainly aims to boost the confidence of young, educated or skilled workers who aspire to become first generation entrepreneurs and also Philip finance to existing small businesses to be able to expand their activities. Mudra bank is an innovation meant for ‘funding the unfunded’, 'banking the un-banked' . Provision of institutional finance to such micro and small business units and enterprises will not only help in improving the quality of life of these entrepreneurs, but also turn them into strong instruments of growth and employment generation. It will provide credit of up to Rs 10 lakh to small entrepreneurs, benefitting small manufacturing units, shopkeepers, fruits and vegetable sellers, hair salon, beauty parlours, truck operators, hawkers, artisans in rural and urban areas[3].

OBJECTIVES OF THE STUDY:

The current paper aims to study the principal objectives of the setting up of MUDRA bank. It also aims to study the expected benefits out of this Govt Initiative and the focus areas that were left out in the initial planning.

The principal objectives of the MUDRA Bank are:

1. It will regulate the lender and the borrower of microfinance and bring stability to the microfinance system through regulation and inclusive participation[1].

2. The Bank will extend finance and credit support to Microfinance Institutions (MFI) and agencies that lend money to small businesses, retailers, self-help groups and individuals[5].

3. It will register all MFIs and introduce a system of performance rating and accreditation for the first time. This will help last-mile borrowers of finance to evaluate and approach the MFI that meets their requirement best and whose past record is most satisfactory. This will also introduce an element of competitiveness among the MFIs. The ultimate beneficiary will be the borrower[6].

4. The bank aims to provide structured guidelines for the borrowers to follow to avoid failure of business or take corrective steps in time. MUDRA will help in laying down guidelines or acceptable procedures to be followed by the lenders to recover money in cases of default.

5. The bank shall develop the standardized covenants that will form the backbone of the last-mile business in future[4].

6. The Bank shall offer a Credit Guarantee scheme for providing guarantees to loans being offered to micro businesses.

7. The bank shall work to introduce appropriate technologies to assist in the process of efficient lending, borrowing and monitoring of distributed capital.

8. The Bank endeavors to build a suitable framework under the Pradhan Mantri MUDRA Yojana for developing an efficient last-mile credit delivery system to small and micro businesses[8].

9. The initiative will also lay down the norms for responsible financing practices for micro-finance institutions so that the small businesses do not face hardship over indebtedness, while getting a fair environment for repayment.

10. It will be responsible for developing and refinancing all micro-finance institutions (MFIs) which are in the business of lending to micro and small business entities engaged in manufacturing, trading and service activities[9].

11. It will also partner with State and regional-level coordinators to provide finance to last-mile financiers of small and micro business enterprises. Its proposed role includes laying down policy guidelines for micro enterprise financing business, registration, accreditation and rating of MFI entities[5].

12. The agency will also lay down responsible financing practices to ward off over-indebtedness and ensure proper client protection principles and methods of recovery, according to an official release.

13. The bank targets to take measures for mainstreaming young, educated or skilled workers and entrepreneurs, including women entrepreneurs[7]

14. A vast part of the non-corporate sector operates as unregistered enterprises and formal or institutional architecture has not been able to reach out to meet its financial requirements. By 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[5].

15. Mudra Bank will partner with local coordinators and provide finance to "Last Mile Financiers" of small/micro businesses

MAJOR PRODUCT OFFERINGS:

MUDRA Bank has rightly classified the borrowers into three segments: the starters, the mid-stage finance seekers and the next level growth seekers[2].

To address the three segments, MUDRA Bank has launched three loan instruments:

1. Shishu: covers loans upto Rs 50,000/-

2. Kishor: covers loans above Rs 50,000/- and upto Rs 5 lakh

3. Tarun: covers loans above Rs 5 lakh and upto Rs 10 lakh

Initially, sector-specific schemes will be confined to “Land Transport, Community, Social & Personal Services, Food Product and Textile Product sectors”. Over a period of time, new schemes will be launched to encompass more sectors.

Some of the Offerings Planned for the Future:

1. MUDRA Card

2. Portfolio Credit Guarantee

3. Credit Enhancement

How Can MUDRA Bank Make a Difference to the Economy?

Most individuals, especially those living in rural and interior parts of India, have been excluded from the benefits of formal banking system. Therefore, they never had access to insurance, credit, loans and other financial instruments to help them establish and grow their micro businesses. So, most individuals depend on local money lenders for credit. The loan comes at high interest and often with unbearable conditions, which make these poor unsuspecting people fall in a debt-trap for generations. When businesses fail, the borrowers become vulnerable to the lender’s strong-arm tactics and other forms of humiliation[8,10].

As per NSSO Survey of 2013, there are close to 5.77 crore small-scale business units, mostly sole proprietorships, which undertake trading, manufacturing, retail and other small-scale activities[9]. Compare this with the organized sector and larger companies that employ 1.25 crore individuals. Clearly, the potential to harness and nurture these micro businesses is vast and the government recognizes this need. This segment is unregulated and without financial support or cover from the organized financial banking system[11].

The strategic advantages expected to be generated out of MUDRA Bank include :

1. For providing Funding for entrepreneurial assistance :

Majority of Indians are poor and live in rural and interior parts of India. Most are excluded from getting facilities that would be termed very basic, even by Indian standards. Most people do not have access to farmland and in the absence of jobs, are left to their own creativity to feed themselves and survive. They figure out ways to do odd jobs in exchange of money or barter their services. Most of the micro enterprises, retail or trading activity, are initiated and controlled by women, with no exposure to education, formal training or access to any form of banking support[5].

If India could harness this free spirit of enterprise and offer some guidance, support, training and financial assistance, then there is a potential to get an immediate jump in GDP.

2. Providing Refinance to existing Micro Finance Institutions:

As per ICRA estimates, the MFI sector, including self- help groups (SHGs) and NBFC-MFIs, had a total portfolio of Rs 780 billion as on September 30, 2014[9]. Assuming an annual growth rate of 10-15 per cent for SHGs and 30-35 per cent for NBFC-MFI for the next two years, the overall microfinance portfolio is likely to cross Rs 1 trillion[9].

With Non Banking Finance Companies- Microfinance Institutions (NBFC-MFIs) likely to have overall debt of Rs 360 billion to Rs 420 billion by March 2016, re-finance from MUDRA Bank could constitute a major portion of the overall debt of the MFIs[9].

3. Lower Cost of Financing for Non banking Financing Institutions:

MUDRA Bank is likely to have access to low cost funds from short falls in priority sector lending, it is likely to pass on the same, leading to lower funding costs for players. The present funding costs of MFIs vary from 12-16 per cent with the median cost of funds being 14 per cent, NBFC-MFIs cost of funds for MFIs could come down by 100-400 bps depending on the share of funding an MFI is able to receive from MUDRA bank[8].

4. Uniformity in Regulations:

It is expected that MUDRA Bank could follow a uniform criteria for onward lending to different players with respect to interest rates and allocation of funds. A single regulator for all entities engaged in microfinance could lead to adoption of a uniform code of conduct for all players in the industry, which could also define the best practices for delivery of financial services to the underserved [6].

5. Last Mile Financer for Small Entrepreneurs:

MUDRA would also partner with State/Regional level coordinators to provide finance to Last Mile Financiers of small/micro business enterprises. Further, the approach goes beyond credit only approach and offers a credit – plus solution for these enterprises spread across the country. The measures to be taken up by MUDRA are targeted towards mainstreaming young, educated or skilled workers and entrepreneurs including /women entrepreneurs[8]. It aims to target small business units, mostly individual proprietorship, which run manufacturing, trading or services activities. These encompass myriad of small manufacturing units, shopkeepers, fruits / vegetable vendors, truck & taxi operators, food-service units, repair shops, machine operators, small industries, artisans, food processors, street vendors and many others.

What MUDRA Bank Misses?

· The Bank has not broadened the definition of priority sector and looking beyond livelihood needs of the poor.

· There is no direct benefit for MFIs as Mudra Bank aims to provide only refinance facility . The modalities of functioning of MUDRA Bank are in place and it has been decided that the funding activity will be carried out by microfinance institutions

· Despite women being the bulk of the borrowers for microcredit, there is nothing specific to encourage women entrepreneurs. For instance, there could have been some share from Mudra for women[5].

· The small businesses are yet to get full information on Mudra Bank and have a clarity on who all are eligible for loans and how to get the benefits of this scheme.

Can MUDRA Really Be a Game Changer for India?

If MUDRA can retain focus on the underprivileged and extend its reach to the interiors, it can well emerge as a big success story. MUDRA Bank is a step by the government that can be a game changer in giving birth to a new set of entrepreneurs. By providing access to institutional finance to micro/small business units/enterprises Mudra Bank 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.

REFERENCES:

1. http://www.business-standard.com/article/economy-policy/pm-launches-mudra-bankto-fund-micro-finance-institutions-115040800189_1.html

2. http://www.thehindu.com/news/national/modi-launches-mudra-bank/article7080418.ece

3. http://www.moneycontrol.com/news/economy/mudra-to-provide-loansto-rs-10-lkhs-to-small-businesses_1352080.html?utm_source=ref_article

4. http://ibnlive.in.com/news/pm-modi-launches-mudra-bank-expected-to-benefit-577-crore-microfinance-institutions-in-india/538566-7.html

5. http://www.dnaindia.com/money/report-11-things-you-must-know-about-mudra-bank-2075665

6. http://profit.ndtv.com/news/economy/article-pm-modi-launches-rs-20-000-crore-mudra-bank-to-fund-the-unfunded-753176

7. http://www.mapsofindia.com/my-india/government/mudra-bank-weighing-the-possible-benefits

8. http://indianexpress.com/article/business/business-others/to-fund-the-unfunded-pm-launches-mudra-bank/

9. http://www.icra.in/Files/ticker/SH-2015-H1-1-ICRA -Micro%20Finance%20Institutions.pdf

10. http://www.bankersadda.com/2015/04/mudra-bank-funding-unfunded.html

11. http://www.newindianexpress.com/nation/Mudra-Innovation-may-Prove-a-Game-Changer/2015/04/10/article2757174.ece

12. http://www.financialexpress.com/article/economy/finance-ministry-considers-clubbing-mfi-mudra-bank-bills/60882/

Received on 11.12.2015 Modified on 04.01.2016

Asian J. Management. 2016; 7(4): 247-250.

DOI: 10.5958/2321-5763.2016.00037.8