A new bank announced in the annual budget last week could boost loans and cut borrowing costs for India’s cash-starved small businesses — tailors, mechanics and phone booth operators who account for around a fifth of the economy.
MUDRA bank – to be set up with $3.2 billion of capital to help microfinancing firms to lend more – should help leverage up firms which account for 40 percent of India’s exports, just as India tries to rekindle growth, lenders and entrepreneurs say.
India’s small businesses employ more than 106 million workers, according to government statistics, in a country that brings a million new workers into the workforce every month.
Yet according to government estimates, only 4 percent of 57.7 million small business units in India have access to institutional finance, leaving many to rely on informal lenders. Industry experts estimate that demand for loans from the sector outstrips supply by more than $80 billion.
Rating agency Crisil estimates that microfinance lenders have loan assets totalling $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.
Even for the microfinance institutions that would like to lend more to businesses, rules cap the amount they can lend to a single borrower at 50,000 rupees ($803), making them an unviable option for many businesses.
via Funding the unfunded: India helps small business borrow to grow | Reuters.
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