Sunday, April 12, 2015

Mudra Bank for the poor - Confusions Galore

Will MUDRA Bank put its stamp on the Indian Financial System as the institution to resolve the Financial Inclusion dilemmas in the rural areas?

Piper calls the tunes. Inauguration of Micro Units Development and Refinance Agency (MUDRA) Bank by the Prime Minister before he left for Canada, Germany and France on a nine-day tour is being seen as a landmark akin to ‘Garibi Hatau’ and IRDP of the forgotten decades. People say that name has a lot to do with institutions. The name and style of MUDRA has built into it an agency and a bank. It has in it, development and refinance as functions.

What will be the rules of refinance? Same as that of NABARD?

The failure of both NABARD and SIDBI opened with much more fanfare when they were formed have disappointed because the persons occupying the key positions after the initial progressive Chairmen, were all from their parent institutions and their mindset did not change. Even today, a decision from NABARD moves like the wheels of the chariot of Lord Jagannatha of Puri. For example, the Fund announced for promoting Processing Companies in 2014-15 languished till the 31st March 2015 for want of putting in place the needed architecture. Same is the case with SIDBI where the fund announced for micro and small enterprise promotion and development hardly took off till the end of March 2015.

NABARD has significant achievements, however, on its Report Card: Watershed management, SHG-bank linkage and Dairy finance. It failed to strengthen the Cooperatives and Regional Rural Banks both as refinance agency and supervisor. Similarly, SIDBI jumped into micro finance. It has still many unfulfilled expectations from the micro and small enterprises, its principal mandate. Now MUDRA joins as one of its arms! Its IDBI culture made it move in favour of collateralized large volumes and prime lending institutions hardly saw it as leader in lending to the MSME sector. Its CGTMSE has little to claim.

Both NABARD and SIDBI are fully owned institutions of Government of India. Bharati Mahila Bank joined a year ago is yet to report its strength in fulfilling the objectives for which it is set up. Is it failure of management or governance or policy or regulation? Is there a guarantee in waiting for the MUDRA to behave better?

Both have all grown under the culture of ‘suspect and respect’ instead of ‘respect and suspect’, the borrowers of their prime lending institutions who belong to the neediest sections of the society. MUDRA for the time being at least is an appendage to SIDBI.

Mudra’s role as has been announced includes:
  • ·         Policy formulation for financing micro enterprises, small business firms and registration of MFIs;
  • ·         Rating and accreditation of MFIs;
  • ·         Setting benchmarks for best practices of lending , client protection and customer service;
  • ·         Providing technology support to cover the last mile entity;
  • ·         Formulating and running a credit guarantee scheme for micro enterprises;
  • ·         Setting up a good architecture for micro finance; and 
  •          Acting as a development and refinance institution.

The above listed role and functions carry with them ambiguity and confusion to say the least.
Mudra means 'stamp'. Will this institution put its stamp on the Indian financial system as a primary lending institution or a refinance institution or NBFC? There would appear to be confusion even at the beginning. Is it going to be an institution engaged in policy for funding the poor or be a regulatory institution for the MFIs? Or is it going to directly fund the poor? It secures capital of Rs.20000 crores from the Union Government as part of budgetary grant. It also gets Rs.3000 crores to provide credit guarantee to the primary borrowers as a risk cover fund.

The Finance Secretary while responding to some queries on the set up and functions mentions that the Bill, a year hence, would define the umbilical cord between the MFIs (even the MFIs would be defined then) and MUDRA. I am not sure whether the RBI at least is clear as to what role this institution would play and what type of clientele it would embrace? Will it be a refinancing institution as the name indicates?

Any financial institution should have built-in capabilities for cross-holding risks among various client groups. Mudra does not exude confidence in this direction as there would appear to be a concentration risk in operations and sovereign risk in funding and governance. These risks need resolution up front instead of later.

The loan products announced: Shishu, Kishore, Tarun are highly innovative and one would like to see the conditions and timelines attached for the sanction of loans. Will Mudra sanction them? Or will it refinance them? If it is refinance, when the banks do not fall short of resources, why would they borrow from Mudra and do on-lending to the retail borrowers? Glitter of products should not be allowed to fade away in acts of inefficiency and loss of perception.

Ambition to provide access to the informal lending sector with ease and softer terms is one thing and putting in place the right policies, right institutions and right persons to hold charge is another thing. Hope that the government would carefully ponder over the organizational structure, nature, role and functions and have informed discussions and wide stakeholder consultations sans the west-bound institutions like the ACCENTURE or PWC or BOSTON.

MUDRA should be an institution embedded in the culture of promoting equity and discipline the cardinal principles of lending for the poor. Like many, I also have lot of hope and a hope that should see its fulfillment.