NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Thursday, March 5, 2015

(Reuters) – A new bank announced in the annual budget last week could boost loans and cut borrowing costs for the country’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.