Letters: A recipe for disaster?

This refers to Rajeev Chandrasekhar's article "MUDRA Bank: A catalyst for India's 10% GDP growth" (March 16). Let us consider four aspects for a reality check. Firstly, the informal sector with physical settlements is an encroacher and squatter, bordering on illegal existence. Take West Bengal, for example, where the government has now launched a scheme to issue a certificate of registration to around 50 lakh hawkers. The idea is to first legalise these enterprises before financing them. Secondly, no credit guarantee scheme can insure any illegal business, when they infringe the municipal Acts - which prohibit the setting up of any units within its limits. The ease of doing business for the informal sector has different paradigms.

Thirdly, if the record of the mother ship, the Small Industries Development Bank of India (Sidbi), is any indicator - whose subsidiary the Micro Units Development Refinance Agency (MUDRA) Bank will be - an exclusive refinancing institution model is a recipe for disaster. One major mistake refinancing institutions make is to not operate at the district or taluka levels and thus, never soil their hands. To make a real impact on over 40 million informal enterprises, the MUDRA Bank should have been conceived with 600 branches at the district level and 6,000 branches at the taluka level, directly financing informal sector units and also refinancing micro finance institutions, thus, setting the standards in the process, while also making a lasting impact.

Lastly, the MUDRA Bank will face situations beyond the scope of normal financing norms as propagated by the Reserve Bank of India (RBI) over decades. Its success will also hinge on its capacity to influence the regulator. The MUDRA Bank cannot bypass the RBI's canons of prudent banking, which are cast in stone, to protect the country's financial system. It cannot be anybody's case that while celebrating the MUDRA Bank's success, we could inadvertently push it towards sub-prime lending.

Y P Issar Karnal

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