MUDRA Bank: Financial Engine Funding the Unfunded

BANGALORE: Finance Minster, Arun Jaitley, presented his first Union Budget, which is targeting to attain a peak in growth. The budget is in favor of benefitting the common man.

The annual budget also presented a new bank could perk up loans and aid the small businesses by trimming the rates of borrowing. These small business sectors include the mechanics, phone booth operators and tailors constituting one fifth of the country’s economy, reports Reuters.

MUDRA Bank (Micro Units Development and Refinance Agency), is set up with a capital of $3.2 Billion, which would help in regulating and refinancing the microfinance institutions.

"The government proposes to set up MUDRA Bank through a statutory enactment. This Bank would be responsible for regulating and refinancing all Micro-finance Institutions (MFI) which are in the business of lending to micro/small business entities engaged in manufacturing, trading and services activities," stated the Finance Ministry.

Small business sector in India constitutes more than 106 million workers today where a millions of employees join the count every month. However, the stumbling block in these statistics is that only a trivial 4 percent of the 57.7 million of the small business approached the financial institutions for capital. The rest of them fall back on the informal lenders.

Crisil, a rating agency, roughly calculated that a sum of $5.6billions form the net loan assets for the microfinance institutions. Yet, the institutions fail to aid the small businesses as they focus on lending individuals among the poor. Moreover, the institutions have a limitation in lending that cannot surpass $803 for an individual.

According to Alok Prasad, chief executive MFIN, a regulatory body for the sector, "The micro and small enterprises have been starved of credit." Speculations suggest that the cap on the microfinance loans would be raised.

In addition to this, excessive collaterals are asked to small businesses by mainstream banks.

Banks facing the financial crunch avoid lending to these small businesses because of small repayment installments. 

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