Union Budget 2015-16: FM's prescription on financial exclusion

To improve the financial architecture of the country, the FM has addressed a few areas

1.    Mudra Bank is proposed to be created with a corpus of Rs. 20,000 crore to refinance MFIs lending to the bottom-of-the-pyramid entrepreneurs running small businesses and wanting to scale them up, or have a dream of starting a new enterprise. The rules in this regard are to be notified.

As the Government sits to draw out the contours of such a bank and the regulations for refinance, we would urge the government to keep the following in mind:

 

• Refinance to be made available to NBFCs and MFIs for on-lending to many different categories of the bottom-of-the-pyramid enterprises such as:

1. Trading and Services
2. Manufacturing
3. Livestock rearing
4. Drivers who want to purchase commercial vehicles

• Refinance to be at a subsidised rate of 7-7.5 per cent to these institutions.
• There should be a margin cap between the refinance rate and the ultimate rate paid by the end-consumer. However the government must engage with NBFCs and MFIs to identify the right level of operating cost and risks involved in funding these categories of borrowers. This should be factored into the margin calculation. Too often, the government fixes a margin with no reference to the actual operating cost or risk, and the scheme fails to take off (a case in point being the Rural Housing Refinance scheme with a margin cap of 2.5 per cent, which does not even meet the operating cost, let alone providing for the risks and return).

2.  It is assumed that the Mudra Bank will also be refinancing MFIs against their micro loans (typically Rs. 10,000 to Rs 15000) to women borrowers. 

Concerns: Long-term housing finance loans for 7-15 years

While micro and small enterprises are fairly well targeted in this budget, there is no coverage or mention of the housing finance needs of these categories. While the Budget talks of housing for all, how do people in EWS/LIG segments buy or build houses in the absence of access to long-term home loans at reasonable rates?

(The author is Managing Director, Equitas Holdings)