As Mudra refinance loses sheen, focus shifts to credit guarantee

After getting a muted response from banks to its refinance facility, the  Micro Units Development Refinance Agency (Mudra), the non-banking finance (NBFC) arm of the Small Industries Development Bank of India, will focus on credit guarantee. 

A little over 40 banks are in the process of availing a credit guarantee from Mudra. Another eight recently bought insurance cover to the extent of about Rs5,000 crore, Jiji Mammen, chief executive, told this newspaper. After demonetisation, the demand for refinance from Mudra had substantially come down. Demonetisation had hit the demand for credit among small and medium 

enterprises (SMEs) and banks were sitting on huge amounts of low-cost deposits, rendering refinance from Mudra irrelevant. 

Mudra loans are essentially a re-categorisation of those for SMEs up to Rs10 lakh. Any loan by a financial institution to an SME below Rs10 lakh is termed a Mudra loan. 

While banks get Mudra refinance at around six per cent, they are required to lend it at their base rate. However, if they don’t avail of refinance, they may lend it at their discretion, with rates linked to the marginal cost of funds — based lending rate (MCLR). 

For example, United Bank of India’s MCLR is about 8.8 per cent and its interest rate for lending to SMEs and micro units is 11.1 per cent (2.3 per cent higher than the MCLR). If the bank did avail of refinance from Mudra, it would need to lend at 8.8 per cent. So far, it has not taken the refinance.

This financial year, Mudra’s total refinance is likely to be close to Rs5,500 crore, against a corpus allocation of about Rs 20,000 crore, said Mammen. In 2015-16, Mudra had sanctioned Rs 3,783 crore, of which the share of commercial banks was Rs 2,432 crore.

“Refinance depends upon liquidity. With demonetisation, banks have a lot of funds and, at this point, are a cheaper source of funds. At the ground level, the amount of Mudra loans are close to Rs1.25 lakh crore,” said Mammen. 

Mudra loans encompass three categories — ‘Shishu’, ‘Kishor’ and Tarun’. These signify the stage of entrepreneurial development, and funding needs of the beneficiary micro-unit entrepreneur. Shishu covers loans up to Rs 50,000 and Kishor above this, up to Rs5 lakh. Tarun covers loans above Rs5 lakh and up to Rs10 lakh. Almost all the loans in this range are re-categorised as Mudra loans, though there has been no refinance from Mudra, the institution. 

With refinance not much in demand, Mudra is likely to aggressively focus on credit guarantee and monitoring of Mudra loans. Last year, the government approved creation of a Credit Guarantee Fund for Mudra loans, expected to guarantee at least Rs1 lakh crore worth of loans to micro and small units in the first instance.