Micro bank macro push

A new bank announced in the budget last week could boost loans and cut borrowing costs for the cash-starved domestic small businesses — tailors, mechanics and phone booth operators who account for around a fifth of the economy.

Micro Units Development Refinance Agency (MUDRA) Bank — to be set up with a corpus of Rs.20,000 crore and a credit guarantee corpus of Rs.3,000 crore to help microfinancing firms to lend more — should help leverage up firms which account for 40 per cent of India’s exports, just as the government tries to rekindle growth, lenders and entrepreneurs say.

The domestic small businesses employ more than 106 million workers, according to government statistics, in a country that brings one million new workers into the workforce every month.

Yet, according to government estimates, only 4 per cent of 5.77 crore small business units have access to institutional finance, leaving many to rely on informal lenders. Industry experts estimate that demand for loans from the sector outstrips supply by more than $80 billion.

Rating agency Crisil estimates that microfinance lenders have loan assets totalling $5.6 billion. But they have had a limited impact on small businesses as they primarily target lending to individuals or groups of individuals among the poor.

Even for the microfinance institutions that would like to lend more to businesses, rules cap the amount they can lend to a single borrower at 50,000 rupees ($803), making them an unviable option for many businesses.

“The micro and small enterprises have been starved of credit," said Alok Prasad, Chief Executive of Microfinance Institutions Network (MFIN), a regulatory body for the sector.

Loans between Rs.50,000 and Rs.10 lakh from formal lenders are ‘almost completely unavailable’, Mr. Prasad said, adding that the Reserve Bank of India had been asked to raise the cap on microfinance loans and a decision was expected soon.

Mumbai entrepreneur Vipul Vora chased more than a dozen banks for two-and-a-half years before a lender finally agreed to give him a Rs. 1 crore loan to set up a plant to produce jaggery, a traditional sweetener.

‘It is absolutely difficult,’ said Mr. Vora, 55, who is starting a new business after closing down an earlier venture five years ago. “I must have printed about 25,000 pages (of paperwork)... Some banks asked for eight times that amount as collateral.’’

Small businesses say mainstream banks often ask them for excessive collateral.

Banks, particularly dominant state lenders who are already under pressure over bad loans, have largely held back from lending to a sector where debt repayment instalments can often be less than the cost of pursuing the payment.

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Printable version | Dec 4, 2021 4:02:57 PM |

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