Mudra (Micro Units Development and Refinance Agency) Bank has been created as a 100 per cent subsidiary of the Small Industries Development Bank of India (SIDBI) to help entrepreneurs and small businessmen — who so far have relied on own resources, moneylenders, or family and friends get access to formal finance from banks and microfinance institutions. It is a daunting task to provide credit to such people, who do not even maintain proper books of accounts and do not come under the tax ambit. But SIDBI’s Chairman and Managing Director, Kshatrapati Shivaji, believes if provided enough credit, these businessmen, sitting at the bottom of the pyramid, can help India reach double-digit economic growth. In an interview with BusinessLine , Shivaji explained his ideas on Mudra and venture capital funding. Edited excerpts from the interview:
Will Mudra Bank become a game-changer for the economy?
The country’s economic growth based on various parameters is hovering at around 6-7 per cent. But if double-digit growth is to be achieved, the government has to identify sections that are not delivering to their potential.
The country has a large section of population at the bottom of the pyramid, but its potential is not getting leveraged. This section is not actively participating in the economic development process.
If the government manages to energise this particular segment, then the impact on the economy will be huge. The quality of their lives will improve provided they get finance for their ventures regularly.
But they do not get funding at the right time and in adequate quantity. The funding should come at reasonable rates and in a transparent manner. This is what Mudra is attempting to do.
Our analysis has shown that Mudra should not become a direct financier.
Therefore, it has decided to concentrate on strengthening the existing financial players who provide microfinance, such as cooperative banks and other bodies. Today, 130 entities have joined up with Mudra, who will provide loans from as low as ₹50,000 to ₹10 lakh. Loans falling in this band are usually not provided by many financial institutions.
A study has shown that only seven per cent of micro-entrepreneurs receive loans from formal lending institutions. The rest of them borrow from friends or moneylenders and the plight of such borrowers is well known.
Therefore, to provide funds to such businessmen, a benign framework has been created, which will provide capital at the right cost. To begin with, Mudra has launched a plain vanilla term loan product and credit card for them.
What was the logic behind launching a credit card under Mudra?
Micro-entrepreneurs in large numbers are also present in the service sector. They require working capital loan regularly. Therefore, Mudra has launched a preloaded and pre-sanctioned credit card.
Today 35,000 cards have been issued by the banks.
When well-to-do people use the credit card, they get interest-free money for one complete cycle.
But, on the other hand, these small businessmen have to pay daily interest on their borrowings to the moneylenders. To end this vicious practice, the card has been launched.
A number of start-ups regularly approach SIDBI for venture-capital funding, how do you select them for receiving the funding. In short, what is the tipping point for these companies?
The innovation quotient of the companies is the tipping point. SIDBI takes into account the innovativeness of the products and its commercial potential.
The products should have the ability to be disruptive in the marketplace and, at the same time, fuel growth in the country.
The antecedents of the promoters are vetted and their passion to create something new in the market is assessed. SIDBI’s external experts, two of whom are former Nasscom chairmen, guide the bank in the selection process.
SIDBI credibility is so high that once a project gets part funding from the bank, it gets easier to get the rest of the funds from other financial institutions.
SIDBI would not like to be a competitor to the existing financial players, but strategically use its strength for building a better market.
This would be favourable and beneficial to the start-up movement in the country.