The growth of the economy during UPA 1/ UPA 2 was 8.7%/7.5%. Unfortunately, this hasn’t translated into an increase in employment with only 15 million jobs being created during 2005-12. One of the biggest promises of PM Modi was creating employment for the youth. Now, to create new employment opportunities one of the fastest ways is to increase the capacity of small industries by funding them. Thus, Micro Units Development and Refinance Agency (MUDRA) was launched to finance and monitor micro-finance institutions (MFIs) or banks which give small loans to fund small units, generally ignored by the banks.
23,000 crores of initial funds and setting up a credit guarantee funds of ₹100,000 crore would be the breather for 5.8 crore small business units and touch the lives of 6.5 percent of the country’s population. It is a scheme of huge proportions.
But how would MUDRA work?
MUDRA loans would be given under 3 names—Shishu (loans up to Rs 50,000), Kishor (up to Rs 5 lakh) and Tarun(up to Rs 10 lakh). Many schemes have come before this, all failed miserably in achieving the target but what sets MUDRA apart is that-
- Previously, MFIs have been working with logical fallacy. In order to get a loan, the small business had to show that it has enough capital to not require one. This was amended. Under MUDRA, they only have to convince the credit officer or the bank manager that they should be lent money.
- Banks have been constantly bullying the borrower into purchasing a life insurance policy which makes the bank a beneficiary in case of the borrower doesn’t die early. This has been taken care under MUDRA.
- The borrower can now draw or deposit the required amount of money, whenever he wants and the lenders will have to calculate the interests accordingly.
But there is still 1000 miles to go and many hurdles that we can see even now-
- The compromise on quality- As the credit decision now lies with the banks, reports indicate that in some cases, money has been lent to unworthy recipients or their relatives.
- Shadow banking – these are the entities with very little regulation and still gives money to risky enterprises. At small scale, their presence doesn’t concern the economy much but when these entities grow and if they fail, then the ripples turn into tsunamis and wipe out whole sectors of an economy.
- There also exist disagreements of what MUDRA should eventually become. Our government’s idea is to establish MUDRA as an umbrella regulator for the microfinance sector. The microfinance industry is however in the favour of RBI keep regulating the sector.
The government-owned banks approved lending of ₹72,000 crore till mid-January and the targets should be met by the end of financial year.
While the clouds around MUDRA being the game changer would only clear when the Union Budget 17-18 is presented, a good matrix to judge the performance is the number of loans that continue to pay their equated monthly instalments (EMIs) on time.