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Unused priority sector lending funds to be diverted to MUDRA Bank

However, the related Rs 3,000 crore credit guarantee fund for the Bank would be set up through Budgetary allocations.

Unused priority sector lending funds of commercial banks will be used to set up the Rs 20,000 crore corpus of the proposed MUDRA Bank. The bank will use at least 65 per cent of its funds for lending to micro enterprises run by members of scheduled castes and tribes.

Typically, domestic commercial banks deposit their lending shortfall from priority sector to the Rural Infrastructure Development Fund of the NABARD while foreign banks are mandated to deposit an amount equal tot he shortfall in priority sector lending with the Small Enterprises Development Fund of the Small Industries Development Bank of India (SIDBI).

“The Rs 20,000 crore corpus will not come from the Budget but out of the priority sector shortfall. The Reserve Bank of India will give this money, which will be used for re-financing,” said Hasmukh Adhia, secretary, department of financial services.


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However, the related Rs 3,000 crore credit guarantee fund for the Bank would be set up through Budgetary allocations.

Finance minister Arun Jaitley had in the Union Budget 2015-16 proposed setting up the Micro Units Development Refinance Agency (MUDRA) Bank. “In lending, priority will be given to SC/ST enterprises,” he had announced.

The Bank, which is expected to start operations this fiscal, would initially be set up as a subsidiary of SIDBI, but the finance ministry would later enact a separate law for it.

“We have to ultimately come out with a statute or Act of Parliament to create the MUDRA Bank, but in the meantime, we will create an agency called MUDRA as a subsidiary of SIDBI initially. It will start doing its business as early as possible,” Adhia said, adding that the statute would define the functions, responsibilities, procedure for refinancing as well as recovery.


The finance ministry plans to rope in non-banking financial companies, small banks and MFIs for lending at the local level while it will also use state cooperative banks and regional NBFCs as an intermediate.

“We only use commercial banks as financing source but they are not very familiar on how to lend to micro enterprises. The MUDRA Bank will use anybody in the last mile and intermediate agencies at the regional level,” Adhia explained.

The finance ministry also plans to bring in stringent penal provisions to deal with defaults. Just 75 per cent of the loan amount would be guaranteed through the credit guarantee fund while the remaining 25 per cent would have to be guaranteed by the MFI.


The Bank will also levy an initial penalty of 0.5 per cent of the default amount on the lender, and the amount could increase for repeat defaulters.

A survey of the National Sample Survey Organisation that revealed that 5.77 crore such micro enterprises, 65 per cent are owned by SC/ST and OBC members.

First published on: 13-03-2015 at 01:45:57 am
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