Strict caps on onward-lending spreads have derailed Mudra Bank’s micro unit refinance scheme, with only Rs150 crore disbursed to banks and MFIs since April 2015 against the current corpus of Rs5,000 crore, says a report from Religare Capital
Mudra Bank's micro unit refinance scheme has turned out to be a non-starter due to the strict caps on onward lending spreads, says a research report. According to a report from Religare Capital Markets Ltd, as against a current corpus of Rs5,000 crore, Mudra Bank has disbursed just Rs150 crore to banks and micro-finance institutions (MFIs) since April 2015. "The Reserve Bank of India (RBI)'s mandate that banks utilise Mudra funds to lend at base rates and non-banking financial companies (NBFCs) and MFIs restrict spreads to 6% and 10% renders the refinancing scheme untenable, considering the high operating and credit costs involved in unsecured microfinance lending," it said.
The RBI has fixed the rates at which Mudra Bank can lend funds under its refinance scheme for unsecured micro loans. For banks, this will be at cost of funds (COF) + 0.75%, for co-operative or regional rural banks at COF + 3.5%, and NBFCs or MFIs at COF + 4 to 6%. The central bank has also capped the spreads that banks, NBFCs and MFIs (Fig2) can charge borrowers if they avail of refinancing from Mudra. While banks have to lend at base rates, NBFCs and MFIs cannot earn spreads over 6% and 10% respectively, implying lending rates of 16-18% for NBFCs and 20-22% for MFIs. This renders Mudra refinancing unattractive due to the high operating and credit costs involved in unsecured microfinance lending.
The borrowing cost of NBFCs and MFIs is already at 10-11%, and even if they avail the refinance from Mudra Bank, there is little or no reduction in cost of funds for them. Religare said, "The government has not yet decided on the rates for borrowings and on-lending for small finance banks (SFB). If the on-lending rate is relaxed in order to attract more borrowers to the banking system, SFBs will benefit from higher growth and lower lending rates for micro loans."
Unused priority sector lending (PSL) funds of commercial banks will be used to set up Mudra’s Rs20,000 crore corpus. These funds will come at 6% interest, which will enable Mudra to refinance at a much cheaper rate to banks and NBFCs for on-lending. Religare said, the priority sector shortfall is about Rs30,000 crore per year and Mudra will have to compete with other agencies like National Bank for Agriculture and Rural Development (NABARD) and Small Industries Development Bank of India (SIDBI) for the allocation.
"Higher achievement of priority sector targets, poor loan growth and trading of PSL bonds could reduce the shortfall in the medium term, thereby restricting the availability of cheaper sources of funds. In addition, we believe that Mudra’s Rs20,000 crore corpus over the next five years will not suffice considering the large borrowing needs of small entrepreneurs. Clarity on market borrowings or borrowings through the international route is awaited – even if these materialise, Mudra’s cost of funds will be much higher," the research note said.
According to Religare, innovative credit guarantees may provide some relief to lenders. Mudra is proposing to give a credit guarantee for defaults on pools and to offer credit enhancement securitisation pools sold by NBFCs, MFIs and banks. The government has allocated Rs3,000 crore in budgetary support for this purpose and Mudra is finalising the scheme’s structure (fees and guarantee percentage).
"In our view, this guarantee is most likely to apply only if the default is over and above the spread earned by banks, NBFCs or MFIs – not an attractive proposition for private banks and NBFCs," Religare concluded.
Mudra Bank was set up by the Indian government through a statutory enactment to refinance micro units under the Pradhan Mantri MUDRA Yojana (PMMY) scheme. It is a refinance agency and not a direct lending institution, set up to provide refinance support to intermediaries such as banks, MFIs and NBFCs for on lending. Mudra is a wholly-owned subsidiary of SIDBI and is currently registered with the RBI as an NBFC. Conversion to a bank will likely take place through a bill to be introduced in the Budget session of Parliament in 2016.