Does Indian Economy Need Mudra Bank?
Does Indian Economy Need Mudra Bank?
To meet the unattended financial needs of unfunded micro units, in last budget PM Narendra Modi presented the concept of creating a financial system for funding the micro business units. The report was presented before the 2015-16 Budget. However, it was rejected stating that there is no need to form a separate development and regulatory bank like NHB. Modi shredded the report and went ahead with his concept that he thought is favorable for Indian economy. The result is MUDRA bank. Here, the experts ponder whether there is need of another refinance body in the Indian Financial system? Do you think Indian Economy really needs Mudra Bank?
- There are almost 57.7 million small business units out of which merely 4% get access to institutional finance. Mudra Bank will help fill this gap with announced corpus of Rs 20,000 crore to refinance MFIs.
- Mudra bank’s primary customers will be micro units which are much more efficient compared to modern corporate. As per the Economic Census 2014, the figure of gross fixed assets of more than 5.77 crore small businesses stands at approximately 11.5 lakh crore.
- Micro units pay more interest than corporates and still contribute 60% more value on their assets than corporate.
- The bank will share the top place with Regional and State level coordinators in the middle and Last Mile Financiers at the end. The MUDRA bank will formalize the non-formal LMFs in order to refinance micro businesses.
- MFIs are dependent on commercial banks for funds and resources are not cheap. The bank will provide funds at cheaper rates and thus, the cost of finance will reduce for small borrowers.
- 57.7 million Micro units operated by entrepreneurs generated more than 128 million jobs while Modern Corporates who received more than Rs 50 lakh through FDI since 1991 only added 2.8 million jobs.
- The ‘NBFC-MFIs’ alone are likely to report overall debt of almost Rs 360-420 billion by March 2016. The new refinance system will account for a major part of the overall debt of the MFIs.
- The problem again remains same. The funding requirements of entrepreneurs who require more than Rs 50,000 to start their unit will not be met.
- The Mudra Bank would require huge scaling up of effective execution, and the past shows it is where the governments fail.
- The bank is expected to give priority to SC/ST entrepreneurs and it will promote feeling of discrimination among different classes.
- There are already such agencies in India including National Housing Bank, NABARD and SIDBI in the business of refinancing. The agencies have not been successful in meeting their objectives,
- Instead of creating Mudra Bank, the government should have strengthened the existing refinance agencies, such as SIDBI and NHB, and channeled the announced funds into the Public Sector Banks. It would have provided PSUs with the much-needed funds to resume lending to industry.
- Creating another refinance agency and then positioning it as a regulator will lead to conflict of interest, with the same agency leading and overseeing regulations.
The Union Budget 2015 was a golden chance for government to sustain the economic revival measures intact by refueling the banks. However, it chose to create a new agency. Here, it is important to understand that as of now there is no need of shadow banks to finance micro or medium enterprises. The global trend is discarding the concept of shadow banking and focusing on the main-line banking system. The government could have opted for Mudra Bank concept after some time as it was initially vital to consider the needs of existing refinance agencies.