UNRAVELLING MICRO UNIT DEVELOPMENT AND REFINANCE AGENCY (MUDRA) Prime M2i Consulting Private Limited

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Alannah Wade
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1 UNRAVELLING MICRO UNIT DEVELOPMENT AND REFINANCE AGENCY (MUDRA)

2 ABOUT MUDRA MUDRA: A refinancing facility for supporting microenterprises Current legal status: NBFC, a wholly-owned subsidiary of SIDBI Corpus: Rs20,000 crore (Rs200 trillion) Credit guarantee corpus: Rs3,000 crore (Rs30 trillion)

wholly-owned subsidiary of SIDBI Corpus: Rs20,000 crore

3 PURPOSE OF MUDRA Providing access to micro-small business units forming part of the Non-Corporate Small Business Sector (NCSBS) Target segment: NCSBS, 5.77 crore such units (NSSO 2013); manufacturing, service or trading Financing bracket: up to Rs 10 lakh to ultimate borrower Client profile to be financed: Sole proprietorship/partnership firms, shopkeepers, vegetable/fruit vendors, truck operators, repair shops, artisans, small industries, food processors Eligible location: Rural and urban

77 crore such units (NSSO 2013); manufacturing, service or trading Financing bracket: up to Rs 10 lakh to ultimate borrower

4 ROLE OF MUDRA Laying down policy guidelines for micro enterprise financing business Registration of MFI entities Supervision of MFI entities Accreditation /rating of MFI entities Laying down responsible financing practices to ward off indebtedness and ensure proper client protection principles and methods of recovery Development of standardized set of covenants governing last mile lending to micro enterprises

financing practices to ward off indebtedness and ensure proper client protection principles and

5 ROLE OF MUDRA Promoting right technology solutions for the last mile Formulating and running a Credit Guarantee scheme for providing guarantees to the loans which are being extended to micro enterprises Supporting development & promotional activities in the sector Creating a good architecture of Last Mile Credit Delivery to micro businesses under the scheme of Pradhan Mantri Mudra Yojana

enterprises Supporting development & promotional activities in the sector Creating a good

6 FINANCIAL INTERMEDIARIES All small business finance entities - on lines of HFCs NBFC-MFIs, NBFCs, Last Mile Financers Small finance banks, Trusts, Societies, Associations, SHGs providing finance to NCSBS Other stakeholders Commercial Banks, RRBs and Cooperative Banks 60% support to flow to businesses in the smallest segment

Associations, SHGs providing finance to NCSBS Other stakeholders Commercial

7 MUDRA EXPECTS FROM INTERMEDIARIES Special schemes for first time entrepreneurs, Youth (up to 30 years) and Women entrepreneurs Emphasis on cash flow based lending rather than collateral based lending; collateral based lending should be avoided Flexible repayment obligations based on business cash flows

cash flow based lending rather than collateral based lending; collateral

8 MUDRA OFFERINGS 1. Product 1: Refinance product for micro units requiring loans from Rs50,000 to Rs10 lakh and loan to Intermediaries for on-lending (Under Pradhan Mantri MUDRA Yojana) 2. Product 2: Development and financial literacy support to sector

9 PRODUCT 1: REFINANCING (UNDER PM MUDRA YOJANA) Shishu: covering loans up to Rs50,000 Kishor Loans from Rs50,000 to Rs5 lakh Tarun: Loans from Rs5 lakh to Rs10 lakh 60% of MUDRA s credit to go to Shishu

10 SCHEMES 1. Sector / activity specific schemes: a. Land transport: auto rickshaw, goods transport vehicles, taxis, passenger cars etc. b. Community, social and personal service: boutique, tailor, DTP, parlour, saloon, courier, pharmacy etc. c. Food products: food processing and making, papad, jelly, pickle, canteen, food stall, sweet shop, bakery, cold storage, cold chain vehicle etc. d. Textiles: handloom, power loom, zari, embroidery, printing, dyeing, accessories, stitching, bags, furnishing etc.

Community, social and personal service: boutique, tailor, DTP, parlour, saloon, co

11 SCHEMES 2. Microcredit schemes: Refinancing of MFIs under qualifying assets for non-farm business activities and microenterprises as per MSMED Act 3. Refinance scheme for RRB/ Scheduled Co-op banks: Refinancing them for microenterprise loan of upto Rs10 lakh 4. Mahila Uddyami Scheme: loan to MFIs, for on lending to women / group of women / JLGs/ SHGs for creation of qualifying assets as per RBI guidelines towards setting up / running micro enterprises as per MSMED Act and non-farm income generating activities

MSMED Act 3. Refinance scheme for RRB/ Scheduled Co-op banks: Refinancing them for microenterprise loan of upto Rs10 lakh 4.

12 SCHEMES 5. Business loan for traders and shopkeepers: loan to intermediaries for on-lending to business/trade upto Rs10 lakh per enterprise/borrower 6. Missing middle credit scheme: Refinance to intermediaries for loans to new/existing microenterprise units as per MSMED Act for loans from Rs50,000 to Rs10 lakh 7. Equipment finance for micro units: loan for purchase of machinery/equipment up to Rs10 lakh

upto Rs10 lakh per enterprise/borrower 6.

13 OFFERINGS PLANNED FOR THE FUTURE 1. MUDRA card: Credit limit of 20% of the loan sanctioned with max. limit of Rs10,000 and credit risk up to 20% can be borne by MUDRA under Credit Guarantee Scheme, card can also be used at ATM 2. Credit guarantee: To mitigate the issue of collaterals, MUDRA will be offering a Credit Guarantee Product. This could be guarantee for a pooled portfolio rather than individual loans 3. Credit enhancement: FLDG, letter of credit or cooriginator to enhance investment grade under securitization

Credit guarantee: To mitigate the issue of collaterals, MUDRA will be offering a Credit Guarantee Product.

14 OFFERINGS PLANNED FOR THE FUTURE 4. Underwriting for intermediaries: In order to help securitization of pool of NCSBS, MUDRA will support to enhance credit rating of such pools 5. Co/multiple originator: As the loan sizes are small, many smaller intermediaries may not be able to provide by themselves a threshold size of assets for securitization. To address such issues, the multiple originator model would be encouraged whereby asset pools of more than one originator / intermediary could be bundled for securitization 6. Business Correspondent: Development of product for lending through Business Correspondent model

Co/multiple originator: As the loan sizes are small, many smaller intermediaries may not be able to provide by themselves a threshold size of assets for

15 ELIGIBILITY CRITERIA FOR AVAILING MUDRA REFINANCE Scheduled Commercial Banks 3 years of continuous profits CRAR of >= 9% Net worth of minimum Rs100 crore NPA <3% Regional Rural Banks Profitable with no accumulated losses CRAR of >= 9% NPA <3%

Net worth of minimum Rs100 crore NPA <3% Regional Rural

16 ELIGIBILITY CRITERIA FOR AVAILING MUDRA REFINANCE NBFC MFIs/NBFCs Lending experience to micro units with loan size upto Rs10 lakh for at least 3 years OR Promoters / management having experience of at least 10 years in this area Outreach: Having minimum out reach of 3000 existing borrowers for MFIs Processes: Having suitable systems, processes and procedures such as internal accounting, risk management, internal audit, MIS, cash management, etc. CRAR: Meeting the minimum CRAR and other norms stipulated by RBI for MFIs registered as NBFC-MFIs and comply all the prevailing RBI guidelines. For all categories of NBFCs, registration with RBI will be mandatory

systems, processes and procedures such as internal accounting, risk management, internal audit, MIS, cash management, etc.

17 ELIGIBILITY CRITERIA FOR AVAILING MUDRA REFINANCE Member of a Credit Bureau Credit Rating requirements NBFC MFIs: Minimum of Mfr5 of CRISIL or equivalent NBFCs: BB- for small NBFCs with up to Rs500 crore portfolio and BBB+ for NBFCs with portfolio >Rs500 crore PAR30: <5% Code of Conduct Assessment with minimum score of 60%

NBFCs: BB- for small NBFCs with up to Rs500 crore portfolio and BBB+ for NBFCs

18 LENDING RATE OF MUDRA Price to be based on risk assessment, geographical distribution, social parameters, etc. Price expected to be bps points below the benchmark repo rate MUDRA expects that lower interest rate will translate into reasonable interest rates to end client

Price expected to be 150-200 bps points below the benchmark repo rate

19 REFINANCING INTERMEDIARIES Primarily: NBFCs/MFIs, Banks Secondary: Sec-8 companies, Trusts, Societies, Associations (MUDRA aims to build their capacity to help them also emerge as strong channels for funding)

20 PROCEDURE All entities to partner with MUDRA will have to register with MUDRA Those registering entities that are not regulated, MUDRA will prescribe regulatory covenants for them

21 COMMON DOUBTS Pricing cap: Broad guidelines do not specify any interest rate cap or margin cap for loans financed through MUDRA s funds. But MUDRA aims to refinance at lower than market rate and clearly expects it to benefit ultimate client through finance at reasonable rate Collateral: Broad guidelines expect and encourage intermediaries to carry out cash flow based lending and to avoid collateral based lending but it does not specifically debar collateral. However, as credit guarantee scheme comes into force, it can take care of collateral for financial intermediaries.

22 COMMON DOUBTS Supervision: Some people have doubts whether MUDRA will start regulating MFIs. However, it is unlikely that MUDRA will assume that role. The guidelines suggest that all institutions expecting to partner with MUDRA for refinance will have to be registered with MUDRA. If such Registered entities of MUDRA are not regulated by any existing Regulator, MUDRA will prescribe set of regulatory covenants for them. The provisions for regulation as envisaged for MUDRA will flow in due course of time upon Statutory Enactment for the creation of MUDRA.

ISSN: 2321-7782 (Online) Volume 4, Issue 1, January 2016 International Journal of Advance Research in Computer Science and Management Studies

ISSN: 2321-7782 (Online) Volume 4, Issue 1, January 2016 International Journal of Advance Research in Computer Science and Management Studies Research Article / Survey Paper / Case Study Available online