MUDRA, short for Micro Units Development and Refinance Agency, sparked hope among the poor, especially the country’s youth, in 2015, his birth year, with promises of hassle-free credit to support their livelihood activities – their micro -existing credit starved businesses or their start-up businesses.
The government is still in the same excitement that it believes and maintains that PMMY (Pradhan Mantri MUDRA Yojana) has been a huge success. Official macro data, at first glance, supports this claim. It shows that the program has helped 310 million people (the number close to the population of the United States or eight times that of Canada) and funded 1586 trillion rupees (the amount exceeding that of individual GDP by some 160 country) ; all of this in just over six years – between April 2015 and September 10, 2021.
MUDRA has promised the rural and urban poor cheap unsecured credit of up to Rs 10 lakh under the PMMY for a wide range of self-employment activities. These loans include three categories: Shishu (for loan up to Rs 50,000), Kishor (Rs 50,000 to Rs 5 lakh) and Tarun (Rs 5 lakh to Rs 10 lakh).
What and why of MUDRA: But, do the realities on the ground correspond to these claims and promises?
First, a little on the genesis and the need, before knowing the truth in the claims. The government established MUDRA in March 2015 as a corporation under the Companies Act 2013. It was established as a 100% subsidiary of the Small Industries Development Bank of India (SIDBI); it was registered, on April 7, 2015, also as a Non-Banking Financial Institution (IFNB) with the RBI. Prime Minister Narendra Modi launched PM MUDRA Yojana (PMMY) the next day, April 8. The current authorized capital of MUDRA is 10 billion rupees and its paid-up capital is 7.5 billion rupees.
MUDRA being a refinancing agency, it does not lend directly but facilitates loans through banks. To be clearer, banks finance microenterprises and MUDRA refinances banks and provides funds to the extent that they have lent under the PMMY. Public and private sector banks, small finance banks, non-bank finance companies, etc., provide loans under MUDRA.
Crucial role of micro-enterprises: So why of MUDRA. Since microenterprise development is crucial for the Indian economy, a MUDRA-type facilitator was deemed necessary to ensure adequate credit to the sector.
Micro-enterprise is the second most important segment, after agriculture. While the MSME as a whole employs 111 million people (NSS 73rd cycle – 2015-16) and supports the lives of 550 million people, its micro-part alone provides 107.6 million jobs (around 97% sector). The majority of the 63.38 million micro-units in the country belong to people belonging to Scheduled Castes, Scheduled Tribes and other backward classes; 54% of the micro-units are located in rural areas and are based in urban areas. They are engaged in manufacturing, processing, trading and services like traders etc. They also include fruit and vegetable vendors, truck and taxi operators, catering units, food processors, repair shops, machine operators, small industries, artisans, street vendors. and a host of people involved in other similar activities.
MSMEs add around 33% to the country’s GVA (gross value added). MSME-related products contribute significantly to the country’s exports; the sector’s share in total exports in 2018-19, for example, was 48.10%.
Despite its crucial importance, this sector does not benefit from adequate institutional funding. The RBI Expert Panel (UK Sinha Committee, 2019) said: “In India, the total demand for external credit is estimated at Rs 37 trillion, while the aggregate supply of finance from formal sources is estimated. to 14.5 trillion rupees. Therefore, the overall credit deficit in the MSME sector is estimated at Rs 20-25 trillion. “
The 2013 National Sample Survey Office survey found that the bulk of MSME units are unregistered businesses and do not keep accounting books. This could explain the reluctance of bankers to lend. Thus, MUDRA was adopted to help increase institutional credit to microenterprises.
The Illusion: But these lofty goals and impressive data projections are of no satisfaction to the poor; the proof of the pudding for them is in its consumption. They neither get adequate cheap credit nor without any collateral as advertised.
Decryption of macro data does not conflict with common experience. For example, the Rs 15.86 trillion (to be exact Rs 15.86,081.69 crore) of loan amount disbursed to over 310 million (exact number 3 10 282 823) people average around Rs 51,000 (Rs 51 117 exactly). This means that most of the loans were in the Shishu category and the loan of Rs 10 lakh was a distant dream for many.
Second, the banks had provided loans to micro-enterprises, but not adequately, even before the advent of MUDRA which they continue to provide after MUDRA. They now mark all non-agricultural, non-corporate production loans up to Rs 10 lakh with the MUDRA “mudra” (seal).
Third, there are complaints from banks insisting on the safety of MUDRA loans, which makes the dream of unsecured loan unreal. In addition, no specific interest rate is prescribed, as the interest rates fall under the deregulated regime. Thus, banks are simply advised to charge “reasonable” interest rates. This means that cheap credit claims are not very credible.
Indeed, no significant additional credit flow – cheap and without collateral – is observed. MUDRA thus created more hype than the actual impact. It is high time that the program was reviewed, that the real challenges of the micro-sector were diagnosed and that corrective measures were taken to ensure an adequate flow of credit to MSMEs in general and microenterprises in particular. Without it, the deal to refinance through newer institutions like MUDRA might not do any better than what the pre-existing deal did.
(The writer is a development economist and commentator on economic and social affairs)