MUDRA2.0

16 min readNov 17, 2018

POLICY NOTE ON PROMOTING ENTREPRENEURSHIP IN THE HINTERLANDS OF INDIA

1. Scope of policy note

The ambit of an Innovation and Entrepreneurship policy is very wide covering diverse aspects like creating jobs, ease of doing business, research & development and intellectual property.

This policy note will focus on entrepreneurship policy matters that emphasise large scale entrepreneurial employment generation, entrepreneurship in the villages and Tier 2 & 3 towns and entrepreneurship especially among youth and women.

Under MUDRA2.0, the policy note will specifically examine the existing Pradhan Mantri MUDRA Yojana (PMMY) and suggest ideas for the next phase of this scheme. It will present ideas to facilitate the supply side (availability of MUDRA loans, geographic distribution etc.), demand side (enabling entrepreneurs, skill development etc.) and regulatory side (RBI regulations etc.).

MUDRA2.0 will help the Government exceed its target of 3 lakh crore loan disbursement and impact 6 crore beneficiaries in 2019. It will help scale these numbers sustainably in the subsequent years.

2. Context Setting

The Micro Small Medium Enterprises (MSME) sector in India employs nearly 12 crore people with 5.8 crore entrepreneurs and entities — like small entrepreneurs, small manufacturing units, shopkeepers, fruits and vegetable sellers, hair salon, beauty parlours, truck operators, hawkers, artisans in rural and urban areas. This sector contributes 38% of the country’s GDP, 45 percent of the manufactured output and 40 percent of its exports[1].

Most of these micro-entrepreneurs work in unorganized sectors and lack in business, marketing and technological skills, and easily available & affordable finance to start and scale their business. Just 4 % of the 5.8 crore small business units have access to bank loans and rely on informal lenders for costly credit. Due to inadequate capital and knowledge, entrepreneurs in rural and semi-urban areas have limited market access and often unable to take risks.

It was in this context that GOI launched Micro Units Development & Refinance Agency Limited (MUDRA) and Pradhan Mantri MUDRA Yojana (PMMY) on 08 April 2015. The guidelines of PMMY issued by Department of Financial Services (DFS), GOI indicated that all banks are required to lend to micro enterprises engaged in manufacturing, processing, trading and service sector activities, for a loan upto 10 lakh INR.

The loan may be given in three categories: Loan upto 50,000 INR under Shishu; 50,000 to 5 lakh INR under Kishor; 5 lakh to 10 lakh INR under Tarun

PM Modi says, “MUDRA Yogajana has given INR 6 lakh crore to 12 crore beneficiaries since Apr 2015

Out of the 12 crore beneficiaries, 28 per cent or 3.25 crore are first-time entrepreneurs
About 74 per cent or 9 crore, borrowers are women and
55 per cent belong to the SC/ST and OBC category[1]”

Cut to 2018, PMYY seems to have delivered spectacular results, although there are conflicting reports on its impact. This note analyses the veracity of these claims and believes that there is real impact on the ground.

Here are some real-world case studies of people benefited by the MUDRA loans[2].

Keya Sarkar always had a keen interest in designing suits and sarees for her family and close friends. They encouraged her to convert her passion into a regular business, which will help her to start earnings. Keya turned her hobby into a business model with the limited capital she had. As the business grew, the requirement for storing the goods arose. she could not store the goods due to space constraint. Due to lack of finances she could not hire a place to keep her goods. Business grew as she resorted to market and sell her designs door to door and in local trains. While working day and night, Keya dreamed of owning her own boutique. After a few months, during one campaign of Prime Minister MUDRA Yojana, State Bank of India, New Barrackpore Branch advised Keya to avail of financial help under MUDRA Yojana to expand her business. She applied and got a loan amount of 4,00,000 INR under Kishor category. With that amount Keya started a boutique and thus fulfilled her long-cherished dream of owning a boutique of her own. Today, she supports 15 women and mentors several young women who want to make a name for themselves in designing.

Dhanapal and the weaving community of 9 villages and 2 Blocks of Thoppampatty and Palani areas of Tamilnadu were undergoing a stressful time as the income generated through weaving was inadequate to run their family. They themselves have a Co-operative society to get work and generate income. The yarns were supplied by the society to its members, who weave dress materials. Despite the society, their livelihood has changed little. During such time the Swaminathapurm Branch of State Bank of India motivated the society to slightly modernize the equipment by availing the loan facility extended by the Bank under Prime Minister MUDRA Yojana under Shishu Category. The loan was extended for purchase of implements and yarns for improvement of business. Under the scheme, the society supplied yarns to its members and the members supplied the dress materials manufactured to the society at a cost. With the help of new implements, the weavers could now generate an additional income of 1,000 INR per week.

Rohit Prasad Maravi, a driver by profession was working with a taxi agency for a salary of INR 5,000. With such a meager salary, he could not meet the family expenses. He had the desire to start his own business, because of his low-income level. However, since he did not have property to offer as collateral, he never thought of availing any bank loan. Rohit approached Central Bank of India, MPHB branch and applied for the loan under Tarun category, so that he himself can own a taxi. Looking into the experience of the applicant in the related field, the bank officials after due verification sanctioned the proposed loan under MUDRA Yojana. Rohit Prasad Maravi purchased a taxi with the sanctioned loan amount and operates around Rampur. Now, Rohit is not only a proud owner of his vehicle and saves INR 17,000 per month after paying his bank loan instalment. His standard of leaving has improved as his income has increased.

As PM Modi stated, “India is a young country where 65% of the population is aged less than 35 years, and we are enabling them to think of innovative solutions.

You will be surprised to know that till now 44% of the start-ups are found in Tier II and Tier III cities, today.
These start-ups have been founded across the 419 districts of India.
Moreover, almost 45% of the start-ups are founded by women entrepreneurs.”

3. Analysis and Recommendations

In this section, we will analyse different dimensions of PMMY and its implementation and propose recommendations for each dimension.

3.1. Job creation

Firstly, let’s study the elephant in the room — did PMYY create new jobs? Only if it did, is there merit in envisaging MUDRA2.0.

Generates 5.5 Crore Jobs through MUDRA Loans
Incremental Job generation due to PMMY pegged at 1.7 crore in two years

Data available with MUDRA, banks and financial institutions pertains primarily to opening of accounts and loan disbursal. It does not capture any numbers on employment generation. The Skoch Group did an extensive ground work to correlate the loan data with job creation and published a report card on MUDRA[3].

· These include 3.8 Crore direct jobs and 1.7 Crore indirect jobs

· Total number of incremental direct jobs created due to MUDRA in the first two years (April 2015 to March 2017) stood at 1.1 Crore. It also led to the generation of 0.5 Crore indirect jobs.

· The data of new entrepreneurs supported under PMMY indicates that out of 3.49 crore accounts financed during the year, 1.25 crore accounts were for new entrepreneurs, which work out to 36%[4]. Over 2 years this ratio stands at 28%.

Thus, it appears that PMYY is generating jobs including incremental ones. MUDRA2.0 should build on the success of PMYY and address some of the gaps identified in the implementation of the first phase.

Recommendation 1: Create a mechanism to track jobs created under MUDRA

The MUDRA agency must set up a third-party mechanism to officially track employment opportunities — both direct and indirect opportunities created through MUDRA loans.

Budget required: 10 crore per annum
Ease of implementation: High. The responsibility for this comes directly under the MUDRA agency
Political Expediency: Medium. When official statistics don’t exist, it is easier to come up with narratives. But there is a desire to control the numbers narrative by collating data as well.
Impact: Medium to High. Provides great visibility to an important outcome.

3.2. Availability of the MUDRA loan

In 2014–15, prior to MUDRA’s launch — the public-sector banks’ lending to micro units stood at about INR 33,000 crore. However, in the first year after MUDRA’s launch, the total credit by PSBs to such units expanded to about ₹59,000 crore, which is nearly doubling of such lending.

While PMYY seems to have positively impacted the disbursement of loans to MSME, the reality is that the actual loans that MUDRA has provided on its own is much lower and can be seen through the refinance numbers.

· The outstanding refinance provided by the government as of March 2017 was just INR 6,114 crore, or not more than 2% of the cumulative disbursals for the first two years

· For instance, 22 banks refinanced INR 3300 crore worth of loans under the MUDRA scheme in 2015–16 and an additional Rs 1200 crore were refinanced in 2017. This is much lower than the amount shown as disbursed under the scheme.

· 80% of MUDRA loans by PSBs fall in the Shishu category (< 50,000 INR). Small ticket business loans are a relatively high-risk category and typically a bank would not lend to this segment at base rate and hence have not taken refinancing from the MUDRA agency

Recommendation 2: Modify the refinance terms of MUDRA loans

The current refinance rates and cap on spreads makes MUDRA scheme unprofitable for banks, NBFCs & MFIs[5]. The RBI’s mandate that banks utilise MUDRA funds to lend at base rates and NBFCs/ MFIs restrict spreads to 6%/10% renders the refinancing scheme untenable, considering the high operating and credit costs involved in unsecured microfinance lending. Similarly, micro finance institutions (MFIs) cannot earn spreads over 10 per cent under MUDRA refinance, whereas the Reserve Bank allows MFIs to have 10–12 per cent, depending on size.

The following tables provide a detailed view of the cost economics of a MUDRA loan by different agencies.

· The Government and RBI should consider increasing the on-lending rate of MUDRA loans to make it financially viable to the banks and NBFCs. While the cost of a loan to the end consumer increases, it will still be considerably lesser than the cost of alternative capital from money-lenders

· The Government and RBI should consider having slabs of spreads depending on the size of the NBFC / MFI. The smaller institutions will not have the operational efficiency to have lower cost of operations and hence they should be allowed higher spreads as compared to the larger institutions. This will bring in more players to disburse MUDRA loans

· The Cabinet in 2016 approved conversion of MUDRA Ltd, an NBFC, into MUDRA Bank and also setting up of a Credit Guarantee Fund for loans disbursed under PMMY. The Credit Guarantee Fund is expected to guarantee more than Rs. 1 lakh crore worth of loans to micro and small units and will help in reducing risk taken by banks and financial institutions in case of default under the scheme

· MUDRA should provide credit-enhancement securitisation pools sold by NBFCs, MFIs and banks — this will encourage trading of portfolio of MUDRA loans disbursed by smaller MFIs and NBFCs to bigger banks and encourage loan growth

Budget required: 3000 Crore (already budgeted). Increased coordination efforts for MUDRA agency
Ease of implementation: Medium. This involves coordination and approvals from the RBI too. The recent Government appointees to the RBI Board will help
Political Expediency: High. The Government has already indicated a willingness to consider this idea
Impact: Very High. Provides amplification to disbursal of loans

Recommendation 3: Bring in more partners to facilitate disbursement of MUDRA loans

MUDRA agency works with the following partners to disburse the loans. As on March 31, 2017, Mudra had 193 partner institutions comprising 27 public sector banks, 18 private sector banks, 31 regional rural banks, 13 State cooperative urban banks, 73 microfinance institutions and 31 non-banking financial companies.

· By modifying the refinance terms for NBFCs, the agency can harness other partners from the 11,000+ small and medium NBFCs.

· The Government and RBI should modify the eligibility criteria especially of smaller NBFCs to increase the number of partners available for disbursing MUDRA loans

· The India Post Payments Bank is going live on Aug 21, 2018 and will operate in 650 branches / districts of India. While IPPB cannot disburse loan on its own, it can become a Business Correspondent for another bank to disburse MUDRA loans. The Government should encourage banks to partner with IPPB on this.

Budget required: Already budgeted. Increased coordination efforts for MUDRA agency
Ease of implementation: Low. Involves coordination and striking agreements with multiple partners
Political Expediency: High. The Government has expressed willingness to consider such a proposal
Impact: High. Provides amplification to disbursal of loans

Recommendation 4: Leverage IT systems for efficient loan disbursement

The MUDRA agency should set up a mobile app to help more micro units across the country avail MUDRA loans for their operations. This MUDRA app is the front-end, while SIDBI’s ‘Udyamimitra’ is the backend. The proposed app would not only focus on making it easier for micro units to apply and avail loans, but also use analytics and AI so that lenders also get more information about the borrowers.

Create IT/MIS system for smooth data capturing: The bank has number of different channels like Brick & Mortar branches, BCAs, kiosk model etc., which help disbursement of MUDRA Loans. There are number of data/information which is demanded from MUDRA, Apex Government and Bank Department, it becomes cumbersome to collect data from different channel and compile within a short period of time[6].

Budget required: 10 crore per annum for the next 3 years for system development and maintenance
Ease of implementation: High. Comes directly under MUDRA agency
Political Expediency: High. Fits in well with the Government’s Digital India narrative
Impact: Medium to High. Increases efficiency of loan disbursement process, esp. for people who do not have good digital financial history

3.3. Geographic coverage for MUDRA loans

Over 70 per cent of the total disbursals under the MUDRA scheme is concentrated in 10 states. Traditionally industrially advanced states like Tamil Nadu, Karnataka and Maharashtra have got the lion’s share, while the backward states, especially North Eastern states lag far behind. Economically backward states need such schemes the most.

Region wise performance by banks (No. of accounts %) — Clearly the Southern states lead in this metric. They also do well in disbursing the higher denomination loans.

Recommendation 5: Devise mechanism to reach all geographies of India

The Government should devise mechanisms to reach to the areas, which are hard to reach.

· Give higher targets for less developed districts

· A state-wise scorecard has already been developed. Create an award modelled on the Swachh Bharat rankings of cities for states that disburse the largest MUDRA loans and create jobs

· Create mechanisms for state level teams to share knowledge and insights with others periodically

· By bringing in smaller NBFCs, MFIs as partners and potentially involving the India Post Payment Bank as a BC for MUDRA loans, Government can achieve deep geographic coverage

Budget required: 10 crore per annum
Ease of implementation: High. Comes directly under MUDRA agency
Political Expediency: High. The Government has established similar comparative scorecards for other initiatives
Impact: Medium to High. Will help reach the remote corners of India. But are the entrepreneurs there ready?

3.4. MUDRA Loan Category Distribution & NPAs

According to the 2016–17 MUDRA annual report, the share of Tarun loans, loans above Rs 5 lakh, is just 1.36% of the total loans given. In terms of amount sanctioned, it contributes to 23 percent, with the average loan size being INR 7,75 Lakh. But nearly 92 percent of loans are given under the Shishu category, where loans of up to Rs 50,000 are given out, with an average loan size of just over INR 23000. This means that the majority of loans are small amount loans to almost 90 percent of the people

Source: Skoch Report on MUDRA Loans

In terms of employment generated per loan amount disbursed, the most efficient form of MUDRA loan appears to be the Shishu scheme.

According to finance ministry data Mudra Yojana had a gross NPA ratio of only 4 per cent as of December 2017, — much lower than average 10 per cent for other loans in the case public sector lenders. According to industry estimates and SIDBI’s estimate (Dec 2017), gross non-performing assets arising out of Mudra loans vary between 10 and 15 per cent, especially in some pockets.

Recommendation 6: Ensure optimal mix of MUDRA loans and monitor NPAs

While Shishu loans are the lowest hanging fruit in terms of loan disbursement, they do not generate the greatest number employment opportunities beyond one individual.

Some trends that have emerged current implementation of PMYY include: One, existing businesses with transaction history have found it much easier to take MUDRA loans. Two, new businesses or those having limited transaction history found it extremely difficult to raise MUDRA loans, especially funds of over Rs 50,000

The financial institutions must encourage consumers to adopt digital payments, MUDRA card for their financial transactions and build a transaction history.

The Tarun and Kishor loans represent disbursements that would potentially generate multiple employment opportunities. MUDRA agency must encourage Public sector banks to focus on Tarun & Kishor loans. The PSBs should be encouraged to develop appropriate incentive models to enable this focus

MUDRA in conjunction with RBI should manage the NPA situation well while increasing the availability and mix of loans. A mechanism should be developed in order to stop wilful default of loans.

Budget required: Already budgeted. Increased coordination efforts for MUDRA agency
Ease of implementation: Low. Banks will have to implement this and foot the increased costs of monitoring. They will have to manage differing expectations of RBI and Government
Political Expediency: Low. At this stage, the Government is interested in overall loan numbers, not NPA
Impact: High. The quality and quantity of jobs created will be better and secure for the future

3.5. Women entrepreneurship

In order to encourage women entrepreneurs, the financing banks / MFIs may consider extending additional facilities, including interest reduction on their loan. MUDRA, under its Women Enterprise Program, extends a reduction of 25bps in its interest rates to MFIs / NBFCs, who are providing loans to women entrepreneurs. As of January ’18, 106 million loans had been sanctioned under the scheme and nearly 75% of all the loans under MUDRA were to women.

This focus is important in the light of the falling Female Labour Force Participation (FLPR) rates in India.

Recommendation 7: Provide online entrepreneurial training to women

In multiple studies, it has been found that cash & asset transfers to female-headed households where recipients survive on less than 2 dollars per day benefits women when such transfers are accompanied with training[7].

· Productive asset transfers (namely, livestock) to very poor women in West Bengal, when paired with training and savings, resulted in increased consumption, at least in part through increases in small business activity as well as an increase in labour supply on the intensive margin

MUDRA agency should commission creation of online content for training women entrepreneurs in villages, Tier 2 and Tier 3 towns.

· It already has programs targeted at imparting financial literacy / inclusion on both the demand and supply side.[8] It should create 50 hours of video content focused on micro-entrepreneur skill development (and make available in all Indian languages)

· MUDRA agency should coordinate with the Women Entrepreneurship Platform (WEP)[9], set-up under NITI Aayog to provide training to women entrepreneurs.

· MUDRA agency may also coordinate with the NS Raghavan Centre for Entrepreneurial Learning (NSRCEL) at the Indian Institute of Management Bangalore (IIMB) which conducts a Women Start-up Programme (WSP)[10].

o The WSP is a first-of-its kind customised online and classroom-training programme designed to enable aspiring Indian women entrepreneurs to systematically identify and test their business ideas. It’s online training capability allowed WSP to train over 6000 women across the country before it shortlisted 100 women entrepreneurs for in-depth mentoring

Budget required: 30 crore over 3 years for online micro-entrepreneur training program
Ease of implementation: Medium. Comes directly under MUDRA.
Political Expediency: High. Fits in well with the Government narrative on empowering women
Impact: Medium. The success of entrepreneurial activity will go up. But this will take time and without an offline mechanism to support, just an online training program will not suffice

3.6. Infrastructure creation for expansion of MUDRA scheme

In rural communities, a huge mismatch exists between demand (targeted beneficiaries) and supply (formal banking system) side which leads to poor credit services. The reasons could be unavailability of quality human resources, poor asset availability, lack of skills, etc. An infrastructure in the form of institutions working solely on entrepreneurial skill development of small industries/enterprises and infrastructure for enterprise development should be setup address this demand-supply gap.

Recommendation 8: Create infrastructure focused on micro-entrepreneurs development

MUDRA agency can model this infrastructure on the Navodyami program of the Deshpande Foundation[11]. It is one of the few programs focused on micro-entrepreneurs in India and trains entrepreneurs to excel in best business practices, and then assists them in scaling up their sustainable enterprises.

· Infrastructure should nurture entrepreneurs from rural and peri-urban areas at the bottom of the pyramid

· The infrastructure should be localized — support 5–6 districts surrounding a MUDRA centre. Over 3 years, set-up 100 MUDRA centres

o Each centre with 3 employees will support 8–10 lakh entrepreneurs (12–15 crore MUDRA loan entrepreneurs); without the online program it is not possible to reach out such large numbers

· The MUDRA centre assists with managing local distribution of online content, and providing mentorship, marketing and business advice in order to scale up — like how to improve business by regularly maintaining accounts, file tax, how a margin can be set, how to approach a client, set targets, workmanship, costing etc.

Budget required: 25 crore per annum for MUDRA centres
Ease of implementation: Medium. Identifying human resources for the centre is difficult
Political Expediency: High. Fits in well with the Government narrative
Impact: High. The success of entrepreneurial activity will go up.