Microfinance Story of India

Facts, opportunities, concerns and updates on the MUDRA Yojna.

Microfinance Story of India

[pib] SFURTI Scheme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : SFURTI Scheme

Mains level : Reviving MSME Sector

Union Minister for MSME has inaugurated 50 artisan-based SFURTI clusters, spread over 18 States.

SFURTI is an off-track scheme compared to other HRD schemes with Hindi acronyms. Similar is the SPARSH scheme for philately.

SFURTI Scheme

  • Scheme of Fund for Regeneration of Traditional Industries (SFURTI) is an initiative by the Ministry of MSME to promote Cluster development.
  • Khadi and Village Industries Commission (KVIC) is the Nodal Agency for the promotion of Cluster development for Khadi.
  • Under the Scheme, the MSME Ministry supports various interventions including the setting up of infrastructure through Common Facility Centers (CFCs), procurement of new machinery, design intervention, improved packaging and marketing etc.

Types of clusters

  • SFURTI clusters are of two types i.e., Regular Cluster (500 artisans) with Government assistance of up to Rs.2.5 crore and Major Cluster (more than 500 artisans) with Government assistance up to Rs.5 crore.
  • The scheme focuses on strengthening the cluster governance systems with the active participation of the stakeholders so that they are able to gauge the emerging challenges and opportunities and respond to them.

Microfinance Story of India

Open Credit Enablement Network (OCEN)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Open Credit Enablement Network (OCEN)

Mains level : Credit facilities for MSMEs

A new credit protocol infrastructure called the OCEN protocol is set to be launched very soon.

Practice question for mains:

Q. What is Open Credit Enablement Network (OCEN)? How it is expected to be a gamechanger in the micro-credit facilitation services in India?

Open Credit Enablement Network (OCEN)

  • OCEN is a credit protocol infrastructure, which will mediate the interactions between loan service providers, usually fintech and mainstream lenders, including all large banks and NBFCs.
  • It is developed by a think tank, Indian Software Products Industry Round Table (iSPIRT).
  • With this, a credit will become more accessible for a large number of entrepreneurs and small businesses in the country.
  • Private equity and venture capital players, angel investors, high net worth individuals and others also could be part of this exercise as investors.

How will it work?

  • iSpirit is partnering with key leaders such as SBI, HDFC Bank Ltd., ICICI Bank Ltd., IDFC First Bank Ltd., Axis Bank Ltd. etc. for this new credit rail.
  • Account Aggregators which will be using these APIs to embed credit offerings in their applications, and will be called ‘Loan Service Providers’, which will play a crucial role in democratizing access to credit, and lowering interest rates for customers.

Why need OCEN?

  • The cost of lending being too high in India, small value loans becomes very unfeasible.
  • OCEN which seeks to connect lenders to marketplaces and thereby to borrowers is a technology system.
  • If implemented, the technology can democratize lending to micro-enterprises and street vendors in a big way.

Microfinance Story of India

[pib] Emergency Credit Line Guarantee Scheme (ECLGS)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Emergency Credit Line Guarantee Scheme (ECLGS)

Mains level : Reviving MSME Sector of India

The Union Cabinet has given its approval for the Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs and MUDRA borrowers.

Practice question for Mains :

Q. Discuss how the nationwide lockdown to control the coronavirus outbreak has led to the resurfacing of inherent bottlenecks in India’s MSME Sector.

About ECLGS

  • Under the Scheme, 100% guarantee coverage to be provided by National Credit Guarantee Trustee Company Limited (NCGTC) for additional funding of up to Rs. 3 lakh crore to eligible MSMEs and interested MUDRA borrowers.
  • The credit will be provided in the form of a Guaranteed Emergency Credit Line (GECL) facility.
  • The Scheme would be applicable to all loans sanctioned under GECL Facility during the period from the date of announcement of the Scheme to 31.10.2020.

Aims and objectives

  • The Scheme aims at mitigating the economic distress faced by MSMEs by providing them additional funding in the form of a fully guaranteed emergency credit line.
  • The main objective is to provide an incentive to Member Lending Institutions (MLIs), i.e., Banks, Financial Institutions (FIs) and NBFCs to increase access to, and enable the availability of additional funding facility to MSME borrowers.
  • It aims to provide a 100 per cent guarantee for any losses suffered by them due to non-repayment of the GECL funding by borrowers.

Salient features

  • The entire funding provided under GECL shall be provided with a 100% credit guarantee by NCGTC to MLIs under ECLGS.
  • Tenor of the loan under Scheme shall be four years with a moratorium period of one year on the principal amount.
  • No Guarantee Fee shall be charged by NCGTC from the Member Lending Institutions (MLIs) under the Scheme.
  • Interest rates under the Scheme shall be capped at 9.25% for banks and FIs, and at 14% for NBFCs.

Benefits of the scheme

  • The scheme aims to mitigate the distress caused by COVID-19 and the consequent lockdown, which has severely impacted manufacturing and other activities in the MSME sector.
  • The scheme is expected to provide credit to the sector at a low cost, thereby enabling MSMEs to meet their operational liabilities and restart their businesses.
  • By supporting MSMEs to continue functioning during the current unprecedented situation, the Scheme is also expected to have a positive impact on the economy and support its revival.

Must read

[Burning Issues] Fiscal Push for MSME Sector of India (Part I)

Microfinance Story of India

[pib] Saras Collection on Government e-Marketplace

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Saras Collection, GeM

Mains level : Not Much

The Union Ministry for Rural Development and Panchayati Raj and Agriculture and Farmers’ Welfare has launched “The Saras Collection” on the Government e-Marketplace (GeM) portal.

Possible prelim question:

‘The Saras Collection’ recently seen in news is a:

a) Subsidy on beekeeping and apiculture projects

b) Indigenous light transport aircraft

c) Database on wetland birds

d) Collection of products made by SHGs

 The Saras Collection

  • It is a unique initiative by the GeM, Deendayal Antyodaya Yojana-National Rural Livelihoods Mission (DAY-NRLM) and Ministry of Rural Development.
  • The collection showcases daily utility products made by rural Self-Help Groups (SHGs) and aims to provide SHGs in rural areas with market access to Central and State Government buyers.
  • The on-boarding of the SHGs has been initially piloted in the states of Bihar, Chhattisgarh, Jharkhand, Karnataka, Kerala, Himachal Pradesh, Maharashtra, Odisha, Rajasthan, Uttar Pradesh and West Bengal.
  • SHGs from all the states and Union Territories (UTs) will be covered rapidly in the upcoming phases.

It’s functioning

  • For Functionaries: They will be provided dashboards at the national, state, district and block level for real-time information about the number of products uploaded, their value and volume of orders received and fulfilled.
  • Government buyers: They will be sensitized through system-generated messages/ alerts in the Marketplace about the availability of SHG products on the portal.

Benefits offered

  • The Saras Collection will provide SHGs with direct access to Government buyers which will do away with intermediaries in the supply chain.
  • Thus it would ensure better prices for SHGs and spurring employment opportunities at the local level.

Back2Basics: Government e-Marketplace

  • The GeM is a one-stop National Public Procurement Portal to facilitate online procurement of common use Goods & Services required by various Government Departments / Organizations / PSUs.
  • It was launched in 2016 to bring transparency and efficiency in the government buying process.
  • GEM aims to enhance transparency, efficiency and speed in public procurement.
  • It is a completely paperless, cashless and system driven e-marketplace that enables procurement of common use goods and services with minimal human interface.
  • It provides the tools of e-bidding, reverse e-auction and demand aggregation to facilitate the government users to achieve the best value for their money.
  • The purchases through GeM by Government users have been authorized and made mandatory by the Ministry of Finance by adding a new Rule No. 149 in the General Financial Rules, 2017.
  • It has been developed by Directorate General of Supplies and Disposals (Ministry of Commerce and Industry) with technical support of National e-governance Division (MEITy).

Microfinance Story of India

Explained: What ails the existing microcredit model

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Microcredit

Mains level : Microfinance in India

  • Microcredit has gained much traction as a tool for ensuring the welfare of the most impoverished in society, and boosting development alongside.

What is Microcredit?

  • Microcredit refers to the granting of very small loans to impoverished borrowers, with the aim of enabling the borrowers to use that capital to become self-employed and strengthen their businesses.
  • Loans given as microcredit are often given to people who may lack collateral, credit history, or a steady source of income.
  • Microcredit agreements frequently do not require any sort of collateral, and sometimes may not even involve a written agreement, as many recipients of microcredit are often illiterate.
  • When borrowers demonstrate success in paying their loans on time, they become eligible for loans of even larger amounts, allowing them to finance expansion.

The idea behind

  • The core idea of microcredit is that a small loan will provide access to the larger economy to people who typically live outside the scope of the institutions on which the mainstream economy rests.
  • Such a loan is meant to enable them to commence with productive activities, and will give them the initial boost required to gain entry into an industry, after which production will be able to sustain itself, and the loan will gradually be repaid.

Part of Microfinance

  • Microcredit falls under the larger umbrella of microfinance, financial services for individuals who don’t have access to traditional services of this kind.
  • Microfinance activities usually target low-income individuals, with the goal of helping them to become self-sufficient. In this way, microfinance activities have an aim of poverty alleviation as well.
  • An example of a microcredit institution is the Grameen Bank in Bangladesh, founded in 1976 by Mohammed Yunus.
  • The Grameen Bank offers small loans to the impoverished without asking for collateral, and was the pioneering institution in the realm of microfinance.
  • The bank has 8.4 million followers, 97% of whom are women, and the bank has repayment success rates between 95 to 98 percent.

Microcredit institutions are failing in India

  • The article in Ideas for India cites a 2015 study that found “a lack of evidence of transformative effects of microfinance on the average borrower”.
  • Another study found that having access to microcredit made very little difference to changing the lifestyles of borrowers, based on six indicators: household business profits, business expenditures, business revenues, consumption, consumer durables spending, and spending on temptation goods.
  • These indicators only saw a 5% impact when microcredit was available.

Why?

  • The primary reason for the lackadaisical effects of microcredit is the stringent repayment schedule offered by most microcredit institutions.
  • Since most borrowers to whom microcredit is given have little to no credit history as a result of their exclusion from traditional systems of credit.
  • Hence institutions offering microcredit are unable to judge the risk associated with lending to certain borrowers, and cannot be sure what the risk of them defaulting will be.
  • To lower the risk of defaulting, microcredit lenders therefore resort to repayment schedules that demand an initial repayment that is almost immediate, to which borrowers must adhere.
  • The effect of this is that borrowers are unable to use the loans on investments that will take some time to be fully realized.
  • The borrowers instead are forced to use the loans they receive on short term investments that only boost production to an extent, and the overall growth of their incomes remains meager.

What are the other applications of microcredit?

  • Conventionally, microcredit has been used mainly for entrepreneurs to begin production and attain self-sufficiency.
  • Small microcredit loans can allow rural labourers –those who are employees, as opposed to entrepreneurs, who are employers– to migrate to urban areas to find work during the lean season, when there is no work to be found on farms.
  • Those who migrated temporarily during this season experienced increased spending in both food and non-food areas, and increased their calories consumed.
  • Microcredit can be used in situations where seasonal factors cause drops in income to overcome these “seasonal credit crunches” and avoid taking decisions which cause people long-term negative impacts.
  • They can also be used to dampen the effects of shocks like floods by providing people with a form of insurance that both increases production before the shock and provides a safety net after.

Conclusion

  • Microcredit has a vast range of applications for poverty alleviation and general development, but existing systems require reform in multiple areas to allow for unfettered benefits that last.
  • Furthermore, in areas were the application of microcredit is relatively new, microcredit systems must be carefully evaluated before they are put into place, so as to enable the greatest benefit from such institutions.

Microfinance Story of India

PSBloansin59minutes.com emerges largest fintech lending platform

Note4Students

Mains Paper 3: Indian Economy | Planning, mobilization of resources, growth, development and employment

From UPSC perspective, the following things are important:

Prelims level: About the Portal

Mains level: Facilitating MSMEs in India


News

  • According to a report by global financial firm, Credit Suisse, the recently launched fintech portal, PSBloansin59minutes.com has, within three months, emerged as the largest online lending platform.

Portal “PSBLoansin59min”

  • It is one of its kind platforms in MSME segment which integrates advanced fintech to ensure seamless loan approval and management.
  • The loans are undertaken without human intervention till sanction and or disbursement stage.
  • A User Friendly Platform has been built where MSME borrower is not required to submit any physical document for in-principle approval.
  • The solution uses sophisticated algorithms to read and analyse data points from various sources such as IT returns, GST data, bank statements, MCA21 etc. in less than an hour while capturing the applicant’s basic details.
  • The system simplifies the decision making process for a loan officer as the final output provides a summary of credit, valuation and verification on a user-friendly dashboard in real time.

Key Features

  • Majority stake of SIDBI & big 5 PSBs- SBI, Bank of Baroda, PNB, Vijaya and Indian Bank.
  • A first for MSME borrowers-Connect with multiple banks without visiting the branch.
  • Only Platform in the market with a Banker Interface which covers the Branch Level integrations (with maker-checker-approver) in tune with current systems of PSBs.
  • Only Platform that enables Bankers to create Loan Products in line with the Scoring models & assessment methods within their approved credit policy.
  • Only Platform that has an integrated GST, ITR, Bank Statement Analyzer, Fraud Check and Bureau Check.

Microfinance Story of India

Labour Bureau files MUDRA job report

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: PMMY

Mains level: Problem of Unemployment


News

  • The Labour Bureau has completed its survey on employment generated by the MUDRA loan scheme, giving the Centre a potential data tool to combat other reports showing a dismal scenario on jobs.

About MUDRA Scheme

  1. The Pradhan Mantri Mudra Yojana was introduced in April 2015 as an effort to extend affordable credit to micro and small enterprises.
  2. Loans up to Rs. 10 lakh are extended to these non-corporate, non-farm enterprises by the Micro Units Development and Refinance Agency (MUDRA) through last-mile financial institutions.
  3. So far, 15.56 crore loans worth a total of Rs. 7.23 lakh crore have been disbursed.
  4. In December 2017, faced with mounting criticism on the failure to create job opportunities, the Labour Ministry had asked the Labour Bureau to initiate the survey on jobs created through the MUDRA scheme.

NSSO survey

  1. The NSSO’s findings showed that unemployment hit a 45-year high of 6.1% in 2017-18.
  2. Central government ministers and officials have already attempted to use the MUDRA scheme’s performance to combat criticism based on the leaked NSSO job survey report.
  3. Some economists have advised caution in the interpretation of MUDRA data, especially as it relates to jobs.

Loan disbursal doesn’t ensure Job

  1. Every new loan certainly doesn’t imply creation of a new job.
  2. It is improbable that these loans are being given to those who were formerly unemployed.
  3. They are more likely being given to people who are moving to self employment from other jobs resulting in no new net job creation.
  4. Given that the average size of the loan disbursed under MUDRA is quite small, it is unlikely that the loan seekers are providing a job to anyone other than themselves.

Microfinance Story of India

Banks to review MUDRA loan book

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: MUDRA scheme

Mains level: NPA Crisis


News

  • The Finance Ministry has asked the banks to review all loans sanctioned under the Pradhan Mantri Mudra Yojana, as the non-performing assets (NPA) have crossed Rs 11,000 crore within three years of the launch of the scheme.

Concerns over MUDRA

  1. The Mudra loan scheme has done very well.
  2. However, the rising NPAs under the scheme are a matter of concern.
  3. It is already three years and there is a need to review how the banks are sanctioning the loans.
  4. The RBI has already flagged its concerns regarding the bad loans to the government.

What went wrong?

  1. To push the scheme, there had been overemphasis on the banks to meet loan disbursal targets.
  2. In the race to meet the target, the credentials of loan-seekers were not being properly verified.
  3. In many instances, loans were being given without any collateral or security, making it difficult for banks to go after defaulters.

Critical Analysis of PMMY

  1. Critics of the scheme say that too many best practices in loan origination have been neglected while authorising and disbursing loans.
  2. Even if loans are sought by business owners genuinely seeking growth and bankers disburse them with an eye on economic development, ensuring repayment is still a challenge.
  3. First, these loans are unsecured a collateral that could protect the interests of the bank is not required, unless an asset that is purchased can itself serve as collateral.
  4. Secondly, the scheme is meant for those who need small amounts, but do not have access to such funds.
  5. But the very nature of the business of such borrowers is susceptible to volatility and annual cycles, not to mention the itinerant ways of some business owners, such as vegetable vendors.
  6. They may choose one location for their place of business on a day, and another elsewhere in their city the next day.
  7. Further, the public banking system may not be staffed for work this may entail.
  8. When it comes to collection, bank staff may choose to go after one loan with outstanding of ₹10 lakh, for example, rather than 10 loans of ₹1,00,000 each.

Back2Basics

Mudra Scheme

Pradhan Mantri Mudra Yojana: Funding the unfunded

Pradhan Mantri Mudra Yojana: Funding the unfunded


 

Pradhan Mantri Mudra Yojana (PMMY) is a flagship scheme of Government of India to enable a small enterprise come into the formal financial system and get affordable credit to run his/ her business.

  • Who? Any Indian Citizen who has a business plan for a non-farm sector income generating activity
  • Credit need? Less than Rs 10 lakh
  • Possible Creditors? Banks, MFI, or NBFC

Types of Loans provided

Under the aegis of Pradhan Mantri MUDRA Yojana, MUDRA has already created the following products / schemes.

  • Shishu : covering loans upto 50,000/-
  • Kishor : covering loans above 50,000/- and upto 5 lakh
  • Tarun : covering loans above 5 lakh and upto 10 lakh

Note that there is no subsidy for the loan given under PMMY. However, if the loan proposal is linked some Government scheme, wherein the Government is providing capital subsidy, it will be eligible under PMMY also.


What is MUDRA Bank and what is its role in the MUDRA Yojna?

  • MUDRA Bank = Micro Units Development and Refinance Agency Bank
  • The Rs 20,000 crore MUDRA Bank aims to provide refinancing to small and medium enterprises, particularly those from SC & ST
  • The idea is to refinance micro-finance institutions through Pradhan Mantri Mudra Yojana
  • This bank would be responsible for regulating and refinancing all MFIs which are in the business of lending to MSME

Are there any concerns regarding the structure or establishment of MUDRA bank?

  • The bank will be financially challenged since inception, if it is funded through non-budgetary support
  • The funds for the bank would be sourced from shortfall in the achievements of the priority sector lending (PSL) targets
  • Currently, the shortfall in the PSL targets of the domestic scheduled commercial banks are deposited in Rural Infrastructure Development Fund (RIDF) and for foreign banks in Small Enterprises Development Fund
  • The fact of the matter is that banks have been surpassing the targets in all years, since 2002, except for the last three years
  • The shortfall lies only in agricultural loans, but it would be unfair to divert the target for agriculture from RIDF to micro units

What are some of the positive points which go in favour of such a scheme?

  • Informal sector accounts for 90% of our non-agricultural workforce, 50% of the GDP & 40% of the non-farm GDP
  • Analysts point that the Indian GDP can be raised by almost 15% if the informal sector data is incorporated in the GDP series
  • The MUDRA bank aims to boost loans and cut borrowing costs for the cash-starved domestic small businesses

But has a direct intervention from government (to facilitate loans) worked in past?

What are some of the prominent concerns in this area?

  • There is always a case for direct government intervention to solve any one of our many chronic problems, to justify the need for MUDRA bank
  • The govt. is trying to ensure equity through determined government action that previously drove the govt. to nationalise banks and bring priority sector lending
  • However, such ‘directed credit’ has not worked successfully in the past
  • The govt. control over banks had led to large-scale corruption and repeated recapitalisation through taxpayers’ money
  • MUDRA bank has been over-burdened with many conflicting objectives and too-many roles, viz. a lender, consultant, regulator, think tank and an agent of social change
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