Very good article in EPW by Deepti George on the Pradhan Mantri MUDRA Yojana (PMMY). She suggests that the MUDRA Bank could shift its focus away from refinance and play a direct role in offering credit guarantees on the loan book of the lending institutions; and credit enhancements for the securitization of their MUDRA loans.
Unlike direct lending or investment, through this the MUDRA Bank’s capital would go longer by being able to leverage a far greater volume of financing for the MUDRA loan lending institutions.
In the context of reforms to PMMY, a few more suggestions:
1. All MUDRA beneficiaries, except perhaps a few categories of Shishu loans, should be encouraged to maintain some basic level of book-keeping of its accounts. A freely available App or web-enabled solution (for different categories of businesses) for this would be the first step in creating a supporting eco-system for these businesses. Similarly, they should also be encouraged to transact digitally. APIs to this solution can be made public to allow fintech and other internet businesses offer different types of services to these MUDRA beneficiaries. This, over time, can help catalyse an enabling eco-system to support the growth of such SMEs and start-ups.
2. Rather than mandatory requirements on these, a better idea may be to make it costlier (both in terms of financial cost as well as effort required) to continue with the business as usual approach as well as more attractive and beneficial to adopt change. The latter can even involve some form of reimbursement on meeting the requirements which can be monitored digitally (say, a waiver of the last repayment tranche or a small interest subvention for compliance with verifiable book-keeping).
3. Availing at least a few types of Kishor and, especially, Tarun loans could be made contingent on some simple and easily captured/observed metric of outcomes (eg. a couple of relevant metrics on growth of output and employment from GST or some other statutory compliance reporting).
4. Tarun loans (Rs 5-10 lakhs) to start-ups could be bundled with privately provided management capacity building support (or management capacity extension service). The management capacity enhancement support could be optional, with partial subsidy. The access to such support should be made easy. Besides, some of the SMEs, as required, could be connected with GEMS, the government e-marketplace. After all, State Finance Corporations (SFCs) are supposed to provide both credit and hand-holding support to its SME borrowers.
5. Given the massive volumes of such transactions, this is a good window for capturing credit histories and creating the conditions for lowering future credit access costs for the vast majority of compliant MUDRA beneficiaries. This becomes even more valuable and actionable given that Aadhaar is now a requirement for MUDRA transactions. Accordingly, MUDRA Bank could take the lead in creating the systems to capturing and consolidating and making available the credit trails from MUDRA transactions without compromising on privacy requirements.
6. The objective behind this approach should be not to capture digital trails and thereby expand the tax base or detect tax evasion, but to help the SME develop capacity and grow sustainably as well as to create an eco-system to support that growth. The latter should, if at all, be a by-product. This needs to be signalled pro-actively so as to shape positive expectations and alleviate concerns. It is important that all government stakeholders involved in this approach their roles from this perspective.
7. The MUDRA Bank should have a research unit that analyses the data emerging from MUDRA loans and its refinance and generates insights that are useful to both itself and the lending institutions to continuously iterate and refine their process to enhance the quality of their service delivery and reduce losses. The Research Unit could enlist partnerships with reputed research institutions, think-tanks, and credible researchers in this effort.
These reforms cannot be decreed into action through legislations, much less guidelines or directives. Their implementation demands focused and long-drawn effort on a mission-mode. This also means appointing a co-ordinating official with the convening power to engage meaningfully and quickly on multiple dimensions. Like the example of eNAM, about which I blogged here, this too is a wicked problem, where implementation is of essence.
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