A new bank announced in the annual budget last week could boost loans and cut borrowing costs for cash-starved small business tailors, mechanics and phone booth operators who account for around fifth of the economy.
Mudra Bank-to be set up with $3.2 billion of capital to help micro financing firms to lend more –should help leverage up firms which account for 40% of India’s exports, just as India tries to rekindle growth, lenders and entrepreneurs say.
In India small business employ more than 106 million workers, according to government statistics, in a country that brings a million new workers into the workforce each month.
According to Government estimates, only 4% of 57.7 million small business units in India have access to institutional finance, which force to rely them on informal lenders. As per industry experts the demand for loans from the sector outstrips supply by more than $80 billion.
Most renowned rating agency Crisil estimates that microfinance lenders have loan assets totaling $5.6 billion. But they have had a limited impact on small businesses as they primarily target lending to individuals or groups of individuals among the poor.
For the microfinance institutions that would like to lend more businesses, rules cap the amount they can lend to a single borrower at Rupees 50000, making them an unviable option for many businesses.
Alok Prasad, Chief Executive of Microfinance Institutions Network (MFIN), a regulatory body for the sector said, “The micro and small enterprises have been starved of credit.”
Loans between Rupees 50000 and Rupees 1 million from formal lenders are “almost completely unavailable”, Prasad said. He also added that the Reserve Bank of India had been asked to raise the cap on microfinance loans and a decision was expected soon.
Small business entrepreneurs say mainstream banks often ask them for excessive collateral.
Banks, particularly dominant state lenders who are already under pressure over bad loans, have largely held back from lending to a sector where debt repayment installments can often be less than the cost of pursuing the payment.