MUDRA Banks – which stands for Micro Units Development and Refinance Agency Banks – is the new buzz word

MUDRA Bank’s aim is to focus solely on the Small and Medium Enterprises (SMEs) – heart of the economy. As a part of the Pradhan Mantri Mudra Yojana –MUDRA Banks is an initiative to ‘fund the unfunded’, And that brings us to the root of the problem or in this case the cause for the need of MUDRA and the need to its success. The small and medium enterprise, easily understood as the small and medium sized businesses – are the most challenged sector in the economy for various reasons. By challenged, it means that ease of doing business is – as per International Finance Corporation not for the faint at heart.

Lack of availability of formal institutional finance – in other words small businesses more often than not don’t get loans from banks/ financial institutions. This is by far the most important problem, a very serious growth inhibitor, faced by the SMEs, which severely cripples their longevity. In our country bank loans are probably the most difficult thing to get – which is both good and bad. The stringent loan approval, appraisal and disbursement policies make sure that bank loans are not a means for unworthy or unlawful activities. But it also means that legitimate small businesses may be deemed unworthy of such credit finance. Banks and Finance Institutions – apart from their mandatory PSL targets – neglect small businesses which can be seen in the from lack of any specialized credit and finance products for thesector. Moreover, small businesses from Tier 2 and Tier 3 cities have a tougher time than their Tier 1 counterparts which is saying something of the existing system of finance and funding to the SMEs in the

country. For any business availability of easy and quick credit is critical to their survival – more so for those enterprises which thrive on day to day sales and do not have years of accumulated profits to fall back on. SMEs which have so much of potential face untimely closure because, either they do not get credit to grow further, or their less than exemplar performance as perceived by the lenders is seen to be a sign of the business decaying and then they foreclose the credit facilities. From the credit institutions point of view – SMEs account for the majority of NPA (Non Performing Assets) – which is currently ailing the banking sector. Increasing NPAs, decreasing profitability, follow up and recovery hardships and increasing cost of funding makes the credit givers deem the SME sector ‘risky’.

The expected impact of MUDRA Banks can be understood as follows: It is designed to re-finance and infuse credit in the market to be available to the SMEs through the MFIs. Currently it will focus of manufacturing, trading and enterprises providing specific services. It is expected to benefit 5.77 crore Small Business Units (SBUs) – which is to say – MUDRA is aiming to revitalize the rural economy. Small businesses units will in turn create gainful employment in very large scale. Think countrywide! Approximately 12 crore people – the largest employer in the country – and adding the multiplier effect – these 12 crore people could provide employment to nearly 25 crore more! With its aim to help the weaker sections of the society – the bottom of the pyramid – SC and STs will get priority in availing credit. Timely finance from the MFIs will ensure the enterprises avoids untimely closure due to lack of funds – and if such SBUs can thrive for a couple of years after the first few years of starting up – then they’ll go a long way. Which in turn will eventually translate into profitability in the years to come – better products, better market share – and most importantly a healthy running business with employment on the offer.


MUDRA Banks also aim at providing a better repayment environment – so that small businesses do not lose a lot of money in repaying their loans. This will be particularly helpful to the SMEs as they can now use the available funds to channel their activities further, instead of worrying about large debt repayment. Agriculture, entrepreneurship, and self-employment are going to be the core target groups of MUDRA Banks – the heart of SMEs. Mudra Bank will also regulate, and make and try to enforce policies for the MFIs lending money to SMEs – all geared towards aiding SMEs growth and development. It will also undertake the task of rating and accreditation of MFIs and will mandate registration of MFIs in India, so that SMEs will have the option to choose their lenders with the beneficial interest rates.

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