MUDRA would integrate last-mile lenders into financial system, says the man behind the idea

In conversation with Prof R Vaidyanathan, the man behind the idea of MUDRA bank.

Prime Minister Narendra Modi launched the Micro Units Development Refinance Agency or the MUDRA bank on Wednesday for small businesses.

The MUDRA bank, set up with an initial corpus of Rs. 20, 000 crore, will focus on 5.75 crore small businesses in the country. It is being hailed as a ‘landmark’ in the country’s growth process and a ‘game changer’.

The basis of creation of the MUDRA bank is said to be the ideas expressed in the book India Un-Inc, authored by IIM Bangalore Professor R. Vaidyanathan. His book focused on the Unincorporated Sector in the Indian economy.

SaddaHaq caught up with Professor Vaidyanathan to know more about the MUDRA bank and how it would function. Here are the excerpts of the conversation:

Congratulations for your idea being implemented in the form of MUDRA. On Twitter, you have compared it to the Uber model. Can you elaborate more?

It is somewhat like the Uber model, but not identical. It is not a lending bank which is going to give money to people. The idea is to integrate the financial market. Already, there are a lot of Micro-Finance Institutions (MFIs), UIBs or the un-incorporated bodies in RBI parlance, and private money lenders. How to integrate them into the main financial market is the question.

So, the money lenders would have some mechanism to get their finances, say from an NBFC (non-bank financial companies), and these NBFCs will have a re-financing mechanism from MUDRA, provided it is registered under MUDRA.

MUDRA will also be doing credit rating. In the long run, a number of these last mile financers, or the money lenders would get integrated into the financial system. Currently they are not.

Secondly, because of this refinancing, the cost of lending would also come down. Though not substantially, but gradually, over a period of time. Over a period of time, some of these bad apples would get sorted, and the good apples would remain, because re-financing is an attractive proposition and the cash cycle would also improve.

The MUDRA bank would not give money directly, but it is strictly a developmental and re-financing agency.

Their role is to identify, register and refinance large NBFCs who are already in the field, register them, and the MFIs also.

The last mile financers or the money lenders – is their registration with MUDRA voluntary or non-voluntary? Why would they register with MUDRA because otherwise they can charge high rates of interest?

The last mile money lenders would be registered with the NBFCs, which will in turn be registered with MUDRA. The registration is completely voluntary. They would have to register voluntarily if they want to get the re-financing. They can still continue to be outside the whole framework. There is no compulsion as such.

They can charge any rate, but re-financing will be done depending upon the rating.

Is there a system of collateral against lending?

Whether there is collateral or not and what is the rate of lending is purely decided between the lender and the NBFC. MUDRA is not the primary lender. It is merely a concentric circle of banking. The NBFC might ask the money lender to put some collateral in return for financing or it might work on the basis of a rating based on earlier good behaviour.

As per my understanding, MUDRA is not going to regulate interest rates.

Basically, MUDRA is just about bringing un-integrated parts of the financial system into the folder of integration.

In what form would MUDRA regulate the MFIs?

Regulation will be on the basis of some guidelines being formulated as to how MFIs will be able to get benefits from MUDRA, provided they follow some pre-conditions. MFIs are not supposed to use arm-twisting methods, as an example. Certain guidelines will be formulated for the behavior of the MFIs. The regulations are within the parameters on the basis of which rating will be done. MFIs would have to file the statements, and annual reports with MUDRA.

How does the rating system work?

After registration, the rating would take place on the basis on certain parameters. It will work similar to the rating agencies such as CRISIL etc, but the rating would be more directed towards the financing side of the picture. It would take into account cash flows. One of the major parameters would be character, which will be judged on the basis of the willingness to repay.

How does the Credit Guarantee Scheme work?

It is yet to be chalked out. I won’t be able to say much now.


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