The fine print of Mudra Bank
If the bank is to be funded through non-budgetary support in the mechanism outlined by Jaitley, it is financially challenged from inception
The rural development ministry has been lobbying hard with the government and the Reserve Bank of India (RBI) to promote a developmental financial institution (DFI) for re-financing the women’s self-help group (SHG) movement to dovetail with its flagship programme—the National Rural Livelihoods Mission. One of the unintended consequences of this lobbying was the setting up of Bharatiya Mahila Bank. However, the proposals to have a new refinance agency have been consistently shot down both by the finance ministry and RBI, possibly with good reason—why do we need to add a new institution, when existing institutions such as the National Bank for Agriculture and Rural Development (Nabard) can do the job?
In this backdrop, finance minister Arun Jaitley’s announcement that a new Micro Units Development and Refinance Agency (Mudra) Bank will be set up with a corpus of Rs.20,000 crore is somewhat intriguing. Like many of the announcements in the budget, Jaitley has not made any budgetary allocation for this corpus. He mentioned this money would come from the shortfall in the achievements of the priority sector lending (PSL) targets.
As of now, the shortfall in the PSL targets of the domestic scheduled commercial banks are to be deposited in the Rural Infrastructure Development Fund (RIDF) managed by Nabard. A look at the overall achievement of the priority sector targets of the banks indicates that domestic banks have been surpassing the targets in all years, starting 2002, except for the last three years, when there was a marginal shortfall. However, banks have been falling short of the specific targets for agricultural lending. The shortfall in achievement of foreign banks are to be invested in the Small Enterprises Development Fund managed by Small Industries Development Bank of India (Sidbi). Foreign banks have been having issues in achieving the targets, but given their overall book size, this amount does not add up to much.
So if Mudra Bank is to be funded through non-budgetary support in the mechanism outlined by the finance minister, it is financially challenged from inception. In addition, there is another angle that makes it even more difficult. One could have argued that while the overall banking sector might be achieving targets, there could be individual banks falling significantly short of targets. A bank having surplus portfolio can offload it to another bank that is in deficit through a portfolio sale or through a process of securitization. This means transferring the underlying risk and therefore it is not a seamless transaction. Because of the complexity, it can be argued that the shortfall in priority targets of individual banks could give scope to contribute to the corpus of the Mudra Bank.
But there is a parallel development. RBI’s internal working group on PSL has suggested an exchange of PSL obligations through PSL certificates, where the underlying risks continue with the loan-originating bank, and the certificates could be traded to the extent of shortfall or excess for a fee. The committee has further suggested that these certificates could be short-sold and squared up at the end of the reckoning date. This, if accepted, effectively takes the possibility of a corpus for Mudra Bank out. The only hope that remains is the shortfall in agricultural loans, but it would be a travesty of justice if a target for agriculture is moved from the RIDF to micro units.
The other issue with Mudra Bank as it is conceived is to be a refinance agency for microfinance institutions (MFIs) to finance “small business entities engaged in manufacturing, trading and services activities”. The press note issued by the finance ministry indicates that this bank would be registering and regulating MFI entities, including SHGs; non-banking finance companies (NBFCs); and trusts and societies. This is a paradigm shift from the directionality in which the microfinance sector has been moving—being regulated by RBI under a separate category called NBFC-MFIs. Jaitley wants to move these entities much beyond the limited functionality given by RBI as per its guidelines. In a way, Mudra Bank represents the aspirations of the microfinance sector as articulated in their demand for a separate microfinance bill, and more.
So, while the refinance function could have well been done through the mechanism of priority sector shortfalls and existing institutions such as Nabard and Sidbi, the proposal to make Mudra Bank a regulatory agency as well takes it directly in conflict with RBI’s regulatory function, and slips in the provisions of the microfinance bill through the back door.
So, we could wait for a slugfest in the near future as this rolls out.
M.S. Sriram is with the Centre for Public Policy at the Indian Institute of Management, Bangalore.
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