Microfinance and the success of Mudra

Microfinance institutions have provided credit to people at the bottom of the pyramid, with no collateral

The Micro Units Development and Refinance Agency (Mudra) has completed eight years. It was set up as a non-banking financial company for supporting the Pradhan Mantri Mudra Yojana (PMMY) — one of the flagship programmes of the present government — on April 8, 2015, by Prime Minister Narendra Modi. I had the great opportunity to pilot this prestigious programme as Mudra’s first chief executive officer, and develop the contours of its implementation.

PMMY was intended to make available credit to the informal sector and help create large-scale employment. It has come a long way since its launch, supporting nearly 410 million small-loan accounts with about Rs 23 trillion extended in financial assistance.

The prime minister, while celebrating the success of PMMY recently, applauded the initiative of microfinance in the country. Out of 410 million accounts supported by it, nearly 85 per cent are in the Shishu category, where the loan amount is up to Rs 50,000 per borrower. In the initial days, the share of such loans was as high as 93 per cent; it came down to 77 per cent in FY22. It may have dropped further in the last financial year.

At the same time, there has been an increase in the proportion of Kishore and Tarun loan accounts. This is a positive indication, pointing to the fact that the units are growing in size and transforming into a higher category of Kishore and Tarun under PMMY. As the names of the loan categories indicate, there is a need for microenterprises to grow, as it happens with humans — a shishu (child) should grow into a kishore (teenager); and later into a tarun (young man).

This was what the prime minister mentioned in his speech during the celebration of PMMY while lauding the microfinance sector. The role played in microfinance by Reserve Bank of India (RBI)-regulated entities is very important in this success. The contribution of microfinance institutions (MFIs) in Shishu loans is close to 40 per cent (it was more than 60 per cent in the initial period), with the balance contributed by banks and small finance banks.

MFIs provided credit to the bottom-of-the-pyramid category, with no collateral. This has helped millions of households to avail themselves of credit and set up small business activities to create employment and better incomes. It is estimated that of the 410 million loan accounts, about 80 million are new enterprises, which means that much new employment may have been created.

In spite of this exceptionally laudable role played by MFIs, many times, the sector gets tarnished by outsiders and organisations with vested interests, which leads to a weakening of the credit culture. In 2010 and 2020, it suffered due to the intervention of the administration in certain states. Other events like floods and natural calamities (and the recent pandemic) have also affected it. But its resilience has seen it rising from the ashes, like the phoenix. 

How do we make microfinance loans more beneficial to borrowers, given that MFIs are often criticised for the higher interest rates they charge? It is true that MFI loans are costlier than bank loans, which are funded mostly by depositors. But MFIs have to borrow from banks or other financial institutions. In addition, the door-step services extended by them adds to the cost.

One of the ways to reduce the cost is to make available cheaper funds to MFIs. Although Mudra was expected to do that, in practice only a small portion of the MFI loans are refinanced by Mudra, or any other development finance institution. One suggestion could be to allow RBI-regulated MFIs to access very small deposits from borrowers, up to a prescribed limit, as is permitted in Bangladesh.

The writer is executive director and CEO, Sa-Dhan, and the first managing director and CEO of the Micro Units Development and Refinance Agency