Various Issues Around Mudra Bank

Mudra Bank has a number of roles and responsibilities. Apart from the primary responsibility to finance the Non – Corporate Small Business Sector (NCSBS), it also has to refinance the MFI’s; setting down policies and guidelines for MFIs, and regulating and rating MFIs. Thus, in the form of MUDRA, we have one institution that is in charge of both lending and regulating the micro lending industry. This might bring a conflict of interest at a later stage in terms of functioning as well as governance, that may not prove effective.

Mudra Bank versus regulation of micro-finance

There are several types of NBFCs in India. NBFC-MFI is one of these types under which MUDRA has been kept as of now. NBFC-MFIs, which have 95% market share, are regulated by RBI. The other MFIs registered under various society acts (such as NGO-MFIs) are no under strict regulatory supervision. IN MUDRA, the government sees a unified regulator for MFIs. The government was planning to merge the MUDRA bill and Microfinance Institutions (Development and Regulation) Bill. The idea is to establish MUDRA as an overarching regulator for the microfinance sector. The Microfinance industry however wants RBI to continue regulating MFIs that are registered as non-banking financial companies (NBFCs) especially when industry has just settled down after the Andhra Pradesh crisis where some MFIs had been charged with practice of charging high interest rates driving their lenders to suicide at times. So, the industry has expressed concerns regarding change in the regulatory architecture.

Financial Challenges

As of now, the shortfalls in the PSL targets of the domestic scheduled commercial banks are to be deposited in the Rural Infrastructure Development Fund (RIDF) managed by NABARD. This money would now be shared with Refinance Fund managed by Mudra Bank.  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 shortfalls 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 critics argue that if Mudra Bank is to be funded through non-budgetary support in the mechanism outlined by the finance minister, it is surely financially challenged from inception.

Yet another refinancing agency?

Another question raised is whether there is need for yet another agency refinancing agency. In the current structure of financial intermediaries, there are a few refinancing agencies already engaged in funding small units, even though their success rate in achieving the mandate is debatable. These include NABARD and SIDBI.

  • NABARD (National Bank for Agriculture and Rural Development) was set up in July 1982. Its aim was to make available credit support and services to the rural and farming segment of the country and also encouraging fair growth which is also sustainable.
  • SIDBI was another refinancing agency which was set up in April 1990. It is the acronym for Small Industries Development Bank of India. The main goal of SIDBI was to lend money to the small and medium business as well as their development and promotion.

These refinancing agencies were not successful in fulfilling their objectives. As such, the benefits of creating a new agency instead of focusing the resources on restructuring the already existing agencies are not clear. Instead of creating the new agency, it could be better to energize the exiting agencies by restructuring and broadening their scope.

Promotion of Shadow Banking?

Mudra bank seems to be promoting shadow banking as its operations are not under the administration and regulation of Reserve Bank of India (RBI).  Shadow banking is globally discouraged as it is considered one of the flaws of the current financial system which leads to global crisis. As such, there is a chance of potential operational risk when Mudra Bank grows in size.

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