Microfinance has been
hailed as a boon to the developing world. By extending small amounts of credit
to would-be entrepreneurs, the model is said to raise incomes, reduce
unemployment, and empower previously marginalized groups, notably women. First
tested in Bangladeshi villages in the 1970s, microfinance was embraced by the
development community in the 1990s and 2000s and has held a special status as a
"transformative" idea. In 2006, Muhammad Yunus won a Nobel Prize for
his microfinance work along with his organization Grameen Bank.
As mainstream
microfinance has matured, focus has turned to the country’s chronically
underserved MSMEs. The changes are being accelerated by the government: last
year, the RBI announced a new category of 'small' bank that focuses on poorer
customers. On 8th April, India PM Modi launched Micro Units Development and
Refinance Agency Ltd. (MUDRA) Bank. Supported by these initiatives, over time,
we expect to see more players and capital flow into the space, resulting in a
greater volume of lending to the under served. MFI funding will impact the growth of MSMEs.
Bandhan
Microcredit : Driver to MSME growth
Bandhan, the country’s
largest microfinance company, is competing closely with Bangladesh’s Nobel
Prize-winning Grameen Bank to become South Asia’s largest micro credit
provider. It is already the largest non-deposit taking microfinace institution in
the world.
In India, this sector
has grown on the Grameen model of lending over the past two decades. Credit
decisions are taken at the branch level, which facilitates disbursal of loans
in about a day. At the end of October, Bandhan’s loan dues were Rs 6,804 crore ($1,091
million); Grameen Bank’s was $1,109 million (Rs 6,900 crore), according to the
company’s website.
Grameen Bank, founded
by Muhammad Yunus in 1976 (founder and institution were jointly given the Nobel
Peace Prize in 2006), has been operating as a full-fledged bank since 1983.
Bandhan is a fledgling in comparison; it started operations in 2011, almost one
and a half decades after Grameen Bank was set up. Even so, it has a customer
base of close to 6 million; Grameen’s is 8.6 mn.
Bandhan has 2,022
branches in 22 states. It recently tied-up with FIS, a US-based company, as
technology partner for the launch of the proposed Bandhan Bank. The seven-year
technology outsourcing arrangement will provide services like core banking,
channel solutions, trade finance, debit card management and transaction
switching. FIS will also be responsible for delivery and management of the
entire information technology infrastructure, including all disaster recovery
capabilities and the inter-branch network.
Bandhan is expected to
start full-fledged banking operations by the end of 2015, opening nearly 600
commercial bank branches in one go. Ahead of foraying into this sector, Bandhan
has stepped up its lending activity. Against an average monthly disbursement of
Rs 1,000 crore in November last year, Bandhan disbursed close to Rs 1,300 crore
this time.
Rupay
Debit Cards
A big chunk of micro
credit comes Regional Rural Banks. After the successful implementation of
Pradhan Mantri Jan Dhan Yojana, India’s financial inclusion plan, all 56 rural
banks have tied with RuPay. Rupay card is based on indigenous technique.
The
domestic card is designed by National Payments Corporation of India. It has
been introduced with an objective to minimize the overall transaction cost of
banks. Till now, the ATM cards were designed on foreign techniques of master
and visa cards. All rural banks also have the facility of National Electronic
Funds Transfer (NEFT) charged at nominal fee of Rs.2.
MUDRA
Bank
In Budget 2015-16,
India’s finance minister Arun Jaitley announced the creation of MUDRA Bank with
the corpus fund of Rs. 20,000 crore and credit guarantee corpus of Rs. 3,000 crore.
MUDRA, to be set up through a statutory enactment, would be responsible for
developing and refinancing through a Pradhan Mantri MUDRA Yojana, all
Micro-finance Institutions (MFIs) which are in the business of lending to micro
/ small business entities engaged in manufacturing, trading and service
activities. MUDRA would also partner with State/Regional level coordinators to
provide finance to Last Mile Financiers of small/micro business enterprises.
The roles of MUDRA bank are :
- Laying down policy
guidelines for micro enterprise financing business
- Registration of MFI
entities
- Accreditation /rating
of MFI entities
- Laying down responsible
financing practices to ward off over indebtedness and ensure proper client
protection principles and methods of recovery
- Development of
standardised set of covenants governing last mile lending to micro enterprises
- Promoting right
technology solutions for the last mile
- Formulating and running
a Credit Guarantee scheme for providing
guarantees to the loans/portfolios which are being extended to micro
enterprises
- Support development
& promotional activities in the sector
- Creating a good
architecture of Last Mile Credit Delivery to micro businesses under the scheme of PM MUDRA
Yojana.
The primary product of
MUDRA will be refinance for lending to micro businesses / units under the aegis
of the Pradhan Mantri MUDRA Yojana. The initial products and schemes under this
umbrella have already been created and the interventions have been named
‘Shishu’, ‘Kishor’ and ‘Tarun’ to signify the stage of growth / development and
funding needs of the beneficiary micro unit / entrepreneur as also provide a
reference point for the next phase of graduation / growth for the entrepreneur
to aspire for:
- Shishu: covering loans
upto Rs. 50,000/-
- Kishor: covering loans
above Rs. 50,000/- and upto Rs. 5 lakh
- Tarun: covering loans
above Rs. 5 lakh and upto Rs. 10 lakh.
Businesses/entrepreneurs/units
covered would include proprietorship/partnership firms running as small
manufacturing units, shopkeepers, fruits/vegetable sellers, hair cutting
saloon, beauty parlours, transporters, truck operators, hawkers, co-operatives
or body of individuals, food service units, repair shops, machine operators, small
industries, artisans, food processors, self help groups, professionals and
service providers etc. in rural and urban areas with financing requirements
upto Rs.10 lakh.
As compared to that
scale, the integration of hundreds of thousands of more informed existing and
new LMFs into the regulatory and refinance architecture of MUDRA bank does not
seem to be a tall order at all. MUDRA, which is a practical idea, is a
potential game changer for the country.
Microfinance
: Catalyst for 10% growth
The Economic Census
Survey of 2012 revealed the scale and magnitude of what we have been ignoring
for several decades. There are 57.7 million enterprises in India, and it
generates employment for 460 million people, of which 262 million people are
self-employed. That this long ignored informal sector is a significant part of
our economy is obvious from the following statistics. It accounts for 90 per
cent of our non-agricultural workforce, 50 per cent of the gross domestic
product (GDP) and 40 per cent of the non-farm GDP. This informal GDP is almost
completely out of the direct tax net and lacks any formal form of access to
credit or risk capital to allow it to grow and join the mainstream economy. A
recent Credit Suisse report stated: "Unlike in developed economies, where
informality is a deliberate choice to avoid taxation or regulations, in India
it is more structural, a reflection of the lack of development and limited
government reach."
Reports have concluded
that Indian GDP can be raised by almost 15 per cent if the informal sector data
is incorporated in the GDP series. Yet, only 4 per cent have access to
institutional credit, with loans between Rs 50,000 and Rs 10 lakh almost
impossible, forcing them to go to moneylenders. The non-corporate sector faces
stiff competition from larger firms, and are further impeded by the lack of
infrastructure and access to easy credit. They are often unable to procure
adequate financial resources for the purchase of machinery, equipment or raw
materials.
Microfinance involves
funding the unfunded, and unlocking the potential of a new pool of
entrepreneurs and future taxpayers in this country. It is encouraging for
entrepreneurship across the economic strata. It is using micro finance, an
economic development tool whose objective is to assist the lower income groups
to develop and grow their small businesses, many of whose owners are
traditionally excluded communities such as Scheduled Castes, Scheduled Tribes
or other Backward Classes, who own almost 60 per cent of all enterprises in
this sector. It represents a real way to make the dreams of millions in the
informal sector, long neglected and ignored, a reality. This formalisation of
the informal sector would expand the tax-GDP ratio and expand the number of
taxpayers and, in turn, government revenues.
This government is
right to see the potential of this sector to drive up jobs and taxes. It has
realised the force multiplier impact on the economy and tax revenues by a
successful formalisation of the informal sector. It has realised the failure of
both the Reserve Bank of India and the banking system in credit-supporting this
sector. This also is core to this new economic philosophy of supporting
enterprise wherever there is a desire for that in our economy, while continuing
with better targeted and well-conceived social security framework for the poor
and needy. Bringing in the untapped informal sector into the
formal one will benefit business and economy.
By - Chaitanya Kulkarni, founder, The Indian Capitalist
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