Beef up existing FIs instead of creating new ones: Bankers

Strengthening existing institutions is more important, because it will be a long time before the new bank becomes operational, said C Rangarajan, former chairman, Economic Advisory Council to the Prim

Finance Minister's Arun Jaitley's Budget proposal to create a Micro Units Development Refinance Agency (Mudra) Bank, to finance the setting up of small and micro enterprises and thereby encourage entrepreneurship among SC/STs and OBCs, has not received an unqualified welcome.

Jaitley announced a corpus of Rs 20,000 crore and a credit guarantee corpus of Rs 3,000 crore for the proposed Mudra Bank.

The government should focus on strengthening existing financial institutions instead of creating new ones, said C Rangarajan, former chairman, Economic Advisory Council to the Prime Minister, and a former Governor of the Reserve Bank of India.

Speaking on the sidelines of a Madras Management Association event last Monday, Rangarajan said, "In India it has become a habit that whenever we have a problem, we set up a committee or an institution. Last year, the government had set up the Mahila Bank to promote women entrepreneurs. This time it is for MSMEs."

Existing institutions like the Small Industries Development Bank of India (Sidbi) already cater to micro, small and medium enterprises (MSMEs). Strengthening existing institutions is more important, because it will be a long time before the new bank becomes operational, said Rangarajan. The government should also think about setting up financial institutions that focus exclusively on long-term finance, he said.

A senior public sector banker, who did not want to be identified, said that if a sector looked attractive, no bank would shy away from lending to it. The government should look at making the MSME sector more vibrant, instead of creating a new institution.

Banks are shying away from lending owing to concerns in the due diligence process. These banks mostly offer services and working capital through factoring services and warehouse receipt financing, but not term loan products for the capex requirements of SMEs, he said.

J James, Coimbatore district president of the Tamil Nadu Association of Cottage and Micro Enterprises, agreed, adding that "it (Mudra) is not necessary at all. Going by the current environment, by the time the bank is operational the MSME sector will not exist at all, if the government doesn't act."

He noted, for instance, that "if an enterprise doesn't repay a loan in 90 days the account becomes a non-performing asset. But it takes around 180-365 days to get bills cleared by a public sector enterprise."

Yet, the government's decision has also been welcomed. Innovative financing measures such as infrastructure bonds and creation of the Mudra bank for the MSME sector augurs well for 'Make in India', said Tulsi Tanti, chairman of the Suzlon Gorup.

T M Bhasin, chairman, Indian Banks Association, and chairman and managing director of Indian Bank, welcomed the proposal for the creation of the Mudra Bank, which will be a refinance institution through the Pradhan Mantri Mudra Yojana.

The finance minister had said in his Budget speech that development has to generate inclusive growth, and while large corporate and business entities have a role to play, this has to be complemented by informal sector enterprises that generate maximum employment.

These measures will greatly increase the confidence of young educated and skilled workers who are able to become first generation entrepreneurs, while existing small businesses will be able to expand their activities. Combined with the proposal for cutting delays in payments due to MSMEs from larger companies, this will lead to hassle-free production by this sector, Bhasin said.

Deepak Narayanan, co-founder, MyCFO, a company that offers CFO services to SMEs, said that Mudra Bank should not be mere tokenism, as governments in the past have used announcements like these for political reasons. This should be merit-based. Enterprising entrepreneurs from SC/STs and OBCs should get this benefit rather than it being misused to dole out favours, he said.