MUDRA BANK

As per the Government of India, large industries provide employment to only

1.25 crore people in the country while the micro units employ around 12

crore people. There is a need to focus on these 5.75 crore self-employed people (owners of the micro units) who use funds of Rs. 11 lakh crore, with an average per unit debt of merely Rs. 17,000. Capital is the key to the small entrepreneurs. These entrepreneurs depend heavily on the local money lenders for their fund requirements.

Looking at the importance of these enterprises, the Government of India launched (April 2015) the Micro Units Development and Refinance Agency Bank (MUDRA Bank) with the aim of funding these unfunded non-corporate enterprises. This was launched as the PMMY (Prime Minister Mudra Yojana). Important features of the MUDRA Bank are as given below:

• Under this banking model, the micro units can avail up to Rs. 10 lakh loan through refinance route (through the Public and private sector banks, NBFCs, MFIs, RRBs, District Banks, etc).

• The products designed under it are categorized into three buckets of finance named Shishu (loan up to Rs. 50,000),

Kishor (Rs. 50,000 to Rs 5 lakh) and Tarun (Rs. 5 lakh to Rs. 10 lakh).

• Though the scheme covers the traders of fruits and vegetables, in general, it does not refinance the agriculture sector.

• There is no fixed interest rate in this scheme. As per the Government of India, presently, banks are charging the interest rates between Base Rate plus one per cent to 7 per cent per annum. Interest rates on the loans are supposed to vary according the risk involved in the enterprises seeking loans. There is no general subsidy offered on interest rates except if the loan is linked to some other government scheme.

1. RBI update, 11 March, 2016 and the Business.gov.in, Government of India, April 2016.

2. The term ‘NOF’ means, owned funds (paid-up capital and free reserves minus accumulated losses, deferred revenue expenditure and other intangible assets) less, (i) investments in shares of subsidiaries/companies in the same group and all other NBFCs; and (ii) the book value of debentures, bonds, outstanding loans and advances, including hire-purchase and lease finance made to, and deposits with, subsidiaries/companies in the same group, in excess of 10 per cent of the owned funds.

3. Ministry of Finance, Economic Survey 2015–16, Vol. 2, (New Delhi: Government of India, 2016), pp. 57–58.

4. Based on the RBI Nationalisation Act, 1949 and further announcements of the, Ministry of Finance, Government of India.

5. RBI Act, 1934, sub-section (1) of Section 42.

6. Reserve Bank of India, Financial Stability Report, Government of India, New Delhi, 2015.

7. Reserve Bank of India, Economic Survey, 2006–07, (New Delhi: Government of India, 2007).

8. RBI (Amendment) Act, 2006, (Mumbai: Government of India, 2007).

9. Reserve Bank of India, Credit and Monetary Policy, (Mumbai: Government of India, 2015).

10. RBI Act, 1934 and Banking Regulation Act, 1949 Section 24.

11. Committee on Financial System (CFS) headed by the then RBI Deputy Governor

M. Narasimhan, 1991.

12. Through an RBI announcement on 15th February. 2012.

13. RBI Act, 1934 and Banking Regulation Act, 1949.

14. Stiglitz and Walsh, Economics, pp. 629–30.

15. Ministry of Finance, Economic Survey 2001–02, (New Delhi: Government of India, 2002).

16. The write-up is based on the RBI’s Credit & Monetary Policy, 2011-12 (in which the scheme was introduced); and the European Central Bank, Frankfurt, Germany and Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) Washington DC, USA

17. Reserve Bank of India, Announcement, 5 April, 2010 (New Delhi: Government of India).

18. Reserve Bank of India Bi-monthly Credit & Monetary Policy, February 2017.

19. As per the Strategic Disinvestment Statement of 1999, the government had decided to cut its holding in them to 26 percent. The policy was put on hold once the UPA Government came to power.

20. Y.V. Reddy, Lectures on Economic and Financial Sector Reforms in India (New Delhi: Oxford University Press, 2002), pp. 137–57

21. Repeated by the Government of India many times, i.e., the New Industrial Policy 1991; the Union Budget 1992–93; Eighth Five Year Plan (1992–97) Draft Approach; etc.

22. Announced by the government while setting up the M. Narasimham Committee on Finacial System on 14 August, 1991. See also Publication Division, India 2011 (New Delhi: Government of India, 2002).

23. The Narasimham Committee handed over its report in record time within 3 months after it was set up.

24. Reserve Bank of India, Committee on Financial Systems, 1991.

25. Ibid.

26. Based on Y.V. Reddy, Lectures on Economic and Financial Sector Reforms in India, 2002.

27. Ministry of Finance, Economic Survey 1998–99, (New Delhi: Government of India, 1999).

28. Based on the Report of the Committee on Banking Sector Reforms, April 1998 (Chairman:

M. Narasimham).

29. An integrated system of regulation and supervision was suggested by the Committee so that soundness of the financial system could be ensured—the concept of a financial super-regulator gets vindicated, as opines Y. V. Reddy, in Lecturers on Economic and Financial Sector Reforms in India, 38.

30. See Publication Division, India 2007 (New Delhi: Government of India, 2008) and

Economic Survery, 2006-07.

31. RBI, New Guidelines on the PSL, 2 March, 2015.

32. Reserve Bank of India, ‘Master Circular - Income Recognition, Asset Classification, Provisioning and Other Related Matters’, July 2013.

33. Economic Survey 2016-17, Government of India, Ministry of Finance, N. Delhi, Vol. 1, pp. 83-84.

34. Economic Survey 2016-17, Government of India, Ministry of Finance, N. Delhi, Vol. 1, p. 85.

35. Through various legislations, since the RBI Nationalisation Act, 1949 and the Banking Regulation Act, 1949 were enacted – and further Amendments to the Acts, Ministry of Finance, Government of India, New Delhi.

36. Simon Cox (ed.), ‘Economics’, The Economist, 2007, p. 75.

37. The BIS is today a central bank for central bankers set up in 1930 in a round tower near Basel railway station in Switzerland as a private company owned by a number of central banks, one commercial bank (Citibank) and some private individuals. Today it functions as a meeting place for the bank regulators of many countries, a multilateral regulatory authority and a clearing house for many

nations’ reserves (i.e. foreign exchange). See Tim Hindle, ‘Pocket Finance’ The Economist, 2007, pp. 35–36.

38. Investments made and loans forwarded by banks are known as risky assets.

39. The capital of a bank was classified into Tier-I and Tier-II. While Tier-I comprises share capital and disclosed reserves, Tier-II includes revaluation reserves, hybrid capital and subordinated debt of a bank. As per the provision, Tier-II capital should not exceed the Tier I capital. The risk-weighting depends upon the type of assets—for example it is 100 per cent on private sector loans, while only 20 per cent for short-term loans.

40. The RBI is a member of the Board of the BIS. The financial sector reforms commenced in India in the fiscal 1992–93 after the report submitted by the Narasimham Committee on Financial system (CFS).

41. Ministry of Finance, Committee on Banking Sector Reforms (M Narasimhan Committee-II), (New Delhi: Government of India, April 1998).

42. Ministry of Finnace, Economic Survey 2006–07.

43. D. M. Nachane, Partha Ray and Saibal Ghosh, India Development Report 2004–05 (New Delhi: Oxford University Press, 2005), p. 171.

44. Ibid, p. 172.

45. G-10 comprises Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, Sweden, UK and USA; later the group incorporated Luxembourg, Switzerland and recently Spain into its fold.

46. Bank of International Settlemets, Basel, Switzerland, 15 May, 2012.

47. Subordinated debt ranks below other debts with regard to claims on assets or earnings (also known as a ‘junior debt’). In the case of default, such creditors get paid out until after the senior debtholders were paid in full. Thus, such capitals of banks are more risky than unsubordinated debt.

48. Reserve Bank of India, MoF, GoI, New Delhi, May 5, 2012.

49. Basel III norms prescribe a minimum regulatory capital of 10.5 per cent for banks by 1 January, 2019. This includes a minimum of 6 per cent Tier I capital, plus a minimum of 2 per cent Tier II capital, and a 2.5 per cent capital conservation buffer. For this buffer, banks are expected to set aside profits made during good times so that it can be drawn upon during periods of stress.

50. The working group was set up in December 1997 under the chairmanship of Y. V. Reddy (the then Deputy Governor, RBI) which submitted its report in June 1998.

51. ‘Other’ deposits with RBI comprise mainly: (i) deposits of quasi-government; other financial institutions including primary dealers, (ii) balances in the accounts

of foreign Central Banks and Governments, and (iii) accounts of international agencies such as the International Monetary Fund.

52. Y. V. Reddy, the RBI Gonvernor, The Economic Times, N. Delhi, 11 September, 2006.

53. S. Sundararajan, Book of Financial Terms, (New Delhi: Tata McGraw Hill, 2004), p. 44.

54. As per the latest update by the RBI, 11 May, 2012.

55. As per the latest update by the RBI, 11 May, 2012.

56. The part of ‘Authorised Capital’ (the limit upto which a company can issue shares) which has been actually ‘paid’ by the shareholders is known as the ‘Paid-up Capital’ of a company. [For detailed analysis of different kind of ‘Capitals’ of a company refer the Chapter 14: Security Market in India.

57. Though this sub-topic originally belongs to the Chapter 14: Security Market in India, it has been discussed here to make the new guidelines of setting-up banks an ‘easy-to-understand’ thing for the readers.

58. Mutual Benefit Society (also known globally as ‘benefit society’ or ‘mutual aid society’) is an organisation, or voluntary association formed to provide mutual aid, benefit, or insurance for relief from common difficulties. Such organisations may be formally organised with charters and established customs, or may arise ad hoc to meet unique needs of a particular time and place. They may be organised around a shared ethnic background, religion, occupation, geographical region or other basis. Benefits may include money or assistance for sickness, retirement, education, birth of a baby, funeral and medical expenses, unemployment. Often benefit societies provide a social or educational framework for members and their families to support each other and contribute to the wider community.

A benefit society may have some common features – members having equivalent opportunity in the organisation; members having equivalent benefits; aid goes to needy (stronger helping the weaker); payment of benefits by collection of funds from the members; educating others about a group’s interest; preserving cultural traditions; and mutual defence. Examples of benefit societies include trade unions, self-help groups, etc. It is believed that such societies predate human culture are found around the world.

# In past, there were two other systems—first belongs Great Britain in which no reserve was maintained upto a certain limit of currency issued, called ‘fiduciary system’ and second known as the ‘proportional reserve system’ in which, generally, 40 per cent reserve was maintained, adopted by France and the USA in 1928 and by India during 1935-56, replaced in October 1956 by a ‘minimum

reserve system’.