Portfolio Credit Guarantee:
- Traditional financing in the Indian context adopts an Asset Based lending approach with emphasis on collaterals. Micro units, most of the time, are unable to provide the comfort of collaterals. Hence MUDRA loans i.e. loans up to Rs.10 lakh, have been made collateral-free, as per the RBI norms in this regard. To mitigate the issue of collaterals, MUDRA is offering a Credit Guarantee Product. MUDRA Credit Guarantee is extended by the creation of a Fund called “Credit Guarantee Fund for Micro Units” [CGFMU] and the scheme has been notified by GoI vide its notification dated April 18, 2016. Accordingly, all eligible microloans sanctioned since April 08, 2015, are covered under the Scheme. The Scheme is being managed by National Credit Guarantee Trustee Company Ltd. [NCGTC], an agency promoted by the GOI.
- Further, given the context of the industry /segment, since the individual loan sizes would expectedly be small and a number of loans will be large, the Mudra Credit Guarantee scheme provides a Portfolio Guarantee. Under this, Credit Guarantee or Risk Sharing is provided for a portfolio of homogenous loans instead of a Scheme for individual loan–by–loan guarantee. This is expected to create administrative efficiencies and increase receptiveness for the Credit Guarantee product. The Guarantee product is one of the key interventions proposed with the objective of bringing down the cost of funds for the end beneficiary to improve its creditworthiness.
Creation of Resources for Credit Enhancement / Guarantee Facility:
- The corpus proposed for the Credit Guarantee Scheme would be regularly augmented with a charge on the outstanding loans under refinance. The same would be utilized for providing a first-loss guarantee/credit enhancement for securitized portfolio loans.
- Credit enhancement: Facilities offered to cover probable losses from a pool of securitized assets in the form of credit risk cover through a letter of credit, guarantee, or other assurance from the originator / co-originator or a third party to enhance investment grade in any securitization process. The first loss facility is the first level of credit enhancement offered as part of the process of bringing the securities to investment grade. The second loss facility provides the second/subsequent tier of protection against potential losses.
Development and Promotional Support
Besides the credit constraints, the NCSBs face many non-credit challenges, like,
- Skill Development Gaps
- Knowledge Gaps
- Information Asymmetry
- Financial / Business Literacy
- Lack of growth orientation
To address these constraints, MUDRA will adopt a credit-plus approach and offer Developmental and Support services to the target audience. It will act as a market maker and build –up an ecosystem with capacities to deliver value in an efficient and sustainable manner.
Imparting Financial / Business Literacy:
- Financial/business literacy or financial education can broadly be defined as ‘providing familiarity with and understanding of financial market products, especially rewards and risks, in order to make informed choices.’ Financial Inclusion and Financial/business Literacy are twin pillars. While Financial Inclusion acts from the supply side providing the financial market/services that people demand, Financial Literacy stimulates the demand side – making people aware of what they can demand. Supporting the financial literacy drive will contribute substantially from the demand side to the national agenda of financial inclusion.
- This apart, the microenterprise segment also needs business literacy which will help them in acquiring knowledge on running / managing business, keeping accounts, working out ratios, etc. Promotion and Support of Grass Root Institutions One of the major focus areas will be to formalize and institutionalize the last mile financiers/grass-root institutions so that a new category of financial institutions viz. Small Business Finance Companies can be created and an ecosystem developed for their growth.
- Rural innovations at the micro-enterprise / unit level would also be one of the key areas for intervention and support. Support to Micro units by way of the facility of incubators would be taken up. This would ensure that at the most grass root levels in the country, there is a climate for promotion of innovation as well as incubation of ideas from educated rural youths which would germinate into viable micro-enterprises.
- Creation of Framework for “Small Business Finance Entities” An enabling framework for support to “Small Business Finance Entities” would be created leading to the formalization of the economy which is presently included in the informal sector. An enabling framework for support to “Small Business Finance Entities” would be created leading to the formalization of the economy which is presently included in the informal sector.
- The government of India has initiated several steps for encouraging enterprise creation in our country. The major one is the “Make in India” movement. Make in India is a major national program designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure. This coupled with Start-up India and Stand-up India campaign has created a conducive environment for enterprise creation on different scales. MUDRA, being an initiative for promoting micro-enterprises, fits well with the Make in India initiative for supporting these micro-enterprises.
- Synergies with National Rural Livelihoods Mission / National Urban Livelihood Mission The National Rural Livelihoods Mission [NRLM] is set up “To reduce poverty by enabling the poor households to access gainful self-employment and skilled wage employment opportunities, resulting in appreciable improvement in their livelihoods on a sustainable basis, through building strong grassroots institutions of the poor.” To achieve the above, NRLM Mission inter alia follows a demand-driven strategy for continuous capacity building, imparting requisite skills, and creating linkages with livelihood opportunities for the poor, including those emerging in the organized sector.
- Similarly, the Deendayal Antodaya Yojana [DAY] National Urban Livelihood Mission is another program that is aimed at reducing Urban poverty through the creation of micro-enterprises, individually and in groups mode.
- MUDRA, being an initiative for promoting micro-enterprises, would make all efforts to draw synergies between NRLM, NULM, and MUDRA interventions for supporting micro-enterprises and creating sustainable livelihood opportunities for the poor. Synergies with National Skill Development Corporation
NSDC is already engaged in the process of skill development on a national scale. Synergizing with NSDC will help MUDRA in augmenting the skill sets of the sectoral players.
- Working with Credit Bureaus With the growth of responsible lending practices, Credit Bureaus (CB) have gained an increasing level of acceptability in the microfinance sector. The CB culture will help in creating credit history over a period of time which will facilitate faster credit dispensation as the system evolves.
- Working with Rating Agencies Accreditation/rating of MFI entities is one of the roles earmarked for MUDRA. Further, a segment of financial intermediaries for the noncorporate small business sector is envisaged to emerge in the financing architecture. MUDRA would work in coordination with Rating Agencies so that appropriate rating framework (s) which take into account sector-specific features are devised for various sector participants. In the longer run, the availability of ratings for sector participants would facilitate formalization and further flow of capital to the sector.
- The MUDRA Pricing Access to finance is critical and equally critical is the cost of finance to the NCSB/ultimate beneficiary. The funds mobilized by micro units from the informal sources are at a high cost. There is scope for cost rationalization. However, the rationalization is intricately linked with the cost of funds for the last mile MFIs. GOI while announcing the formation of MUDRA also announced a refinance corpus for MUDRA at 20000 crores, to be allocated by RBI from the Priority Sector lending shortfall. Accordingly, RBI has provided the allocation which helps in bringing down the cost of lending at the ultimate borrower level as MUDRA refinance will reduce the average borrowing cost of the lending institutions The NBFC-MFIs are presently regulated by the Reserve Bank of India and RBI has already prescribed detailed guidelines for margin cap in respect of MFIs.
- The margin cap has been pegged at 10% for MFIs having loan portfolios of more than 100 crores and 12% for smaller MFIs having loan portfolios of less than 100 crores or 2.75 times the average base rate of five major commercial banks, whichever is less. In the backdrop of these guidelines and the fact that the MFI sector has been constantly trying to reduce its costs, MUDRA would also help MFIs reduce their cost to bring down the overall cost to the end beneficiaries. Further, at the time of appraisal, MUDRA would be studying/assessing individual MFIs on this as well as other related parameters and suitably price its assistance based on such assessment.
- In the case of Banks, RBI has also put a cap on the interest rate at the Base rate/ MCLR for lending micro units by Commercial Banks by availing of MUDRA refinance. Similarly, the RRBs and Cooperatives have been given an interest cap of 3.50% over and above the MUDRA refinance rate, while lending to MUDRA loans by availing of MUDRA refinance. In the case of NBFCs, RBI has also stipulated an interest cap of 6% over and above MUDRA refinance while lending to the MUDRA segment.
- All of these are expected to have a positive impact on the pricing of MUDRA loans in the country whereby the Microenterprises will be able to avail of credit at an affordable interest rate. But, the first and foremost objective is to ensure accessibility of credit.