MUDRA: More hype than actual impact

MUDRA, short for Micro Units Development and Refinance Agency, raised the hopes of the poor, particularly youth in the country, in 2015, its birth year, with promises of hassle-free credit to prop up their livelihood activities – their existing micro-enterprises starved for credit or their startup ventures.

The government is still in the same excitement as it believes and maintains that PMMY (Pradhan Mantri MUDRA Yojana) has been a tremendous success. The official macro data, prima facie, supports the assertion. It shows that the scheme helped 310 million persons (the number close to the US population or eight times that of Canada) and financed Rs 15.86 trillion (the amount more than that of the individual GDP of some 160 countries); all this, in a little over six years – between April 2015 and September 10, 2021.

MUDRA promised both rural and urban poor a collateral-free cheap credit up to Rs 10 lakh under PMMY for a wide range of self-employment activities. These loans comprise three categories: Shishu (for the 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 match with these claims and promises?

First, a little about the genesis and the need, before knowing the truth in the claims. The government established MUDRA in March 2015 as a company under the Companies Act, 2013. It was set up as a wholly-owned subsidiary of Small Industries Development Bank of India (SIDBI); it was registered, on April 7, 2015, also as a Non-Banking Finance Institution (NBFI) with the RBI. Prime Minister Narendra Modi launched PM MUDRA Yojana (PMMY) the next day, April 8. MUDRA’s present authorised capital is Rs 10 billion and paid-up capital of Rs 7.5 billion.

Since MUDRA is a refinance agency, it does not directly lend but facilitates lending through banks. To be clearer, banks finance micro-enterprises and MUDRA refinances banks and supplies funds to the extent they have lent under PMMY. Public and private sector banks, small finance banks, non-banking finance companies etc, give loans under MUDRA.

Micro-enterprises’ crucial role: Then, why of MUDRA. Since micro enterprise’s development is crucial for the Indian economy, a MUDRA-like facilitator was felt necessary to ensure adequate credit to the sector.

The micro-enterprise is the second most important segment, after agriculture. While the MSME as a whole employs 111 million persons (NSS 73rd round - 2015-16) and supports the lives of 550 million people, its micro part alone provides 107.6 million jobs (about 97% of the sector). The majority of 63.38 million micro-units in the country are owned by the persons belonging to Scheduled Castes, Scheduled Tribes, and Other Backward Classes; 54% of micro-units are located in the rural areas and rest in urban areas. They are engaged in manufacturing, processing, trading and services like shopkeepers etc. They also include fruits and vegetable vendors, truck and taxi operators, food-service units, food processors, repair shops, machine operators, small industries, artisans, street vendors and a host of those involved in other similar activities.

MSME adds about 33% to the GVA (Gross Value Added) of the country. MSME-related products significantly contribute to the country’s exports; the sector’s share in total exports in 2018-19, for instance, was 48.10%.

Despite its crucial importance, this sector does not get adequate institutional finance. RBIs Expert Committee (U K Sinha Committee, 2019) says, “in India, the total addressable demand for external credit is estimated to be Rs 37 trillion while the overall supply of finance from formal sources is estimated to be Rs 14.5 trillion. Therefore, the overall credit gap in the MSME sector is estimated to be Rs 20–25 trillion.”

The 2013 survey of National Sample Survey Office found that the bulk of MSME units are unregistered enterprises and they do not maintain the books of accounts. This could be a reason for the bankers’ reluctance to lend. So, MUDRA has been taken up to help increase the institutional credit to micro-enterprise.

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 eating. They neither get adequate cheap credit nor without any collateral as has been publicised.

The deciphering of the macro data doesn’t conflict with the common experience. For instance, the Rs 15.86 trillion (to be exact Rs 15,86,081.69 crore) worth of loan amount disbursed to more than 310 million (exact number 3,10,282,823) persons works out on an average to about Rs 51,000 (Rs 51,117 exactly). That means most of the loans were under the Shishu category and Rs 10 lakh loan has been a distant dream to many.

Secondly, the banks had been giving loans to the micro-enterprises, though not adequately, even before MUDRA’s advent which they continue to give after MUDRA. They now brand all non-farm, non-corporate, production loans up to Rs 10 lakh with MUDRA’s ‘mudra’(seal).

Thirdly, there are complaints of banks insisting on security for MUDRA loans making the collateral-free loan dream unreal. Also, no specific interest rate is prescribed as the interest rates are under the deregulated regime. So, the banks are simply advised to charge ‘reasonable’ interest rates. This means cheap credit claim is not highly credible.

In effect, no significant additional credit flow – cheap and collateral-free - is observed. MUDRA has thus created more hype than the actual impact. It is high time the scheme is reviewed, actual challenges of the micro sector diagnosed and corrective action taken to ensure adequate credit flow to MSME in general and microenterprise in particular. Without that, the refinance arrangement through newer institutions like MUDRA may not do any better than what the pre-existing arrangement did.

(The writer is a development economist and commentator on economic and social affairs)