The Government is pinning its hopes on the new refinance mechanism, MUDRA Bank, for providing organised credit at reasonable rates to informal enterprises. It feels this will speed up development of the sector which is a high job creator. BusinessLine caught up with Financial Services Secretary Hasmukh Adhia to find out more on Micro Units Development Refinance Agency or MUDRA and the insurance Bill, among others. Edited excerpts from the interview:
How will the MUDRA Bank work?
The idea of MUDRA Bank came from the results of a NSSO study in 2013 which said there are 5.7 crore informal enterprises in India that are unincorporated, single person or two-person units. These enterprises are getting only four per cent credit from the institutional mechanism and 96 per cent from informal sources. This was a shocking figure. These units employ 12 crore people. The employment potential of informal enterprises is huge. So, why are we neglecting this sector?
Why don’t we make a formal arrangement for making finance available to such units? All this led to the concept of MUDRA Bank.
Initially, we will carve out a separate subsidiary from SIDBI, which will be registered as an NBFC and the corpus of ₹20,000 crore will flow from the priority sector shortfall (deposited by banks with RBI). In addition, we will give ₹3,000 crore as guarantee corpus from the Budget, which can guarantee up to ₹40-45,000 crore of loans. This will enable various small banks, NBFCs and MFIs to give loans to people at cheaper rates.
Because once a guarantee is given, the risk margin will come down. There will be a new Bill for the creation of MUDRA, which will be a kind of refinance bank like SIDBI.
Second, in spite of so many years of trying, the microfinance sector has not developed. Today, 400-500 commercial banks and 12,000 NBFCs are registered with the RBI, but only 52 microfinance institutions (MFIs). An attempt was made in 2007-08 to bring a MFI Act, then again in 2012 an Act was proposed, but it could not get passed by Parliament.
Now, along with Mudra Bank, we will like to focus on how to give more finance, guarantees to MFIs and bring them into the formal channel so they are enabled to give credit to smaller people at lower rates.
What kind of fund flows do you expect after the passage of the insurance Bill?
It is not important how much investment comes, what is important is that they (foreign investors) bring along the best practices in the sector abroad. That will help us.
One of the provisions in the Bill talks about allowing the four nationalised general insurance companies (Oriental Insurance, New India Assurance, National Insurance and United India Insurance) to raise money by offloading government shares up to 49 per cent. Is this the first step toward privatisation?
We brought this provision for the banking sector long ago. Has it (privatisation) happened in banks? No. It may happen any day, but it is up to the government to decide. This is only a first step toward bringing insurance companies on par with banks so that they can also raise capital from the markets.
The Budget makes provision for a Bank Board Bureau. What will its structure be and when it will be in place?
The bureau will, tentatively, be a body of six people, five professionals and one Secretary, Department of Financial Services. The final approval has to come from the Cabinet Committee on Appointments. Of the five members, at least three will be banking professionals and the remaining two can be other professionals, say, management or legal experts.
It will take us five-six months to put the system in place.
The Budget says that the Bureau will be an interim step towards establishing a holding and investment company for public sector banks. What is the rationale behind such a company?
This company will hold the equity of government in banks. On the basis of its strength, we can raise more funds from the market which can be pumped into the equity of banks. This mechanism will be very, very successful. This company will also be owned by the government.
Does this mean there will be no need for Budgetary allocation for bank recapitalisation?
Yes, this is one of the best methods for capitalisation.
Bank recapitalisation norms have been changed from need-based to performance-based. Accordingly, only nine banks were given addition capital during 2014-15. Don’t you think this will affect other banks in meeting capital adequacy norms?
They are already meeting the norms. The common (pure) equity norm is 5.5 per cent, and it is supposed to be remained constant for next five years i.e. till 2019. The average of all public sector banks is 8 per cent and the worst has got 6.5 per cent. So, common equity is not an issue. The issue is about additional tier-1 (AT1) and additional tier-2 (AT2) bonds. There also, depending upon the requirements, banks have been raising AT1 and AT2 bonds and a lot of people are willing to subscribe to these because they are looking for long-term investments. So, pension funds and insurance funds are investing in AT1 and AT2 bonds. In the new pension fund regulations, we have allowed AT1 & AT2 bonds as one of the admissible instruments for investment. We have told banks that more or less we will be giving the amount equal to the dividend they give to the government. But this does not mean that we will give it to the same banks.