India’s new MUDRA bank looks to fund small businesses

The new bank announced in India’s latest budget could aid lending to small businesses.

India’s most recent yearly budget announcement revealed plans to set up a new bank that will aim to lend more to the nation’s cash-starved small companies. As these micro and small businesses account for around a fifth of India’s economy, it’s a clever move from the government that could rekindle growth through the Micro Units Development Refinance Agency (MUDRA) bank.

Government statistics show that small businesses in India employ over 106 million workers and account for around 40 per cent of exports. However, many are unable to access institutional finance.

According to government estimates, only four per cent of the 57.7 million small business units in India are able to apply for loans from financial institutions, which means many of them have to rely on informal lenders.

The new MUDRA bank should change this, as it will be set up with $3.2 billion of capital to help microfinancing firms lend more to businesses that have been crying out for funding.

Despite this, microfinance lenders have a cap on the maximum amount they are allowed to loan to a single borrower, which is set at a little over $800 and so are not a viable option for many businesses.

During the budget announcement, finance minister Arun Jaitley described MUDRA as integral to “generate inclusive growth”. He noted that “large corporates have a role to play”, however, explained that inclusive growth has to come from informal sector enterprises that “generate maximum employment”.

MUDRA will complement the government’s Make in India initiative and has the potential to transform the economy, not to mention those businesses that will be able to secure the much-needed funding they need to expand. Furthermore, it will finally allow those non-formal financiers and informal micro businesses a platform to formally exchange services.