MUDRA Bank – How will it help?

First things first, a regulator cum re-financier (market player)  is bad design. Period. It leads to moral hazard where the regulator will shape policy to grow only its business. Yes, refinance is business.

But I hear that MUDRA Bank is expected to be a regulator and financier of microfinance institutions and micro-enterprises. Why?

The only other entity with such an entitlement, the National Housing Bank (which is a regulator and refinancier for Housing finance companies and bank housing loans) is expected to lose that status once the long pending NHB Bill is passed in its current form. The bill aims to move the regulatory powers of the NHB to the RBI and let NHB continue to operate as a sector focussed bank like NABARD and SIDBI. Obviously, the law makers realised that regulation and business do not go hand in hand.

That brings me to the second question, NABARD refinances MFIs, so does SIDBI. SIDBI refinances/ guarantees small/micro enterprise finance. So, basically, between the two they pretty much already do what the MUDRA Bank is supposed to do on the refinance side. So, why do we need a MUDRA Bank?  Yes, they don’t regulate. So, to regulate?

When the microfinance crisis broke out, there were discussions of NABARD being made a regulator for the MFI industry but that did not happen, primarily due to the fact that NABARD was actually a refinancier (a service provider) for MFIs and the significant majority wanted NABARD to continue as a service provider and not become a regulator in parts due to the lack of infrastructure and in parts to avoid the moral hazard issue. The only reason why NABARD was brought into the picture was microfinance institutions not only included the RBI regulated NBFC-MFIs but also societies and trusts not regulated by he RBI.  However, NABARD felt that they did not have some of the “missing links to operate in the sector” as a regulator.

What then, will the MUDRA Bank do differently? If the several decade old and experienced NABARD thinks they can’t handle the job, how will the MUDRA Bank manage?

Another interesting proposed change is that the FMC and SEBI are going to be merged, the logic seems to be that financial and commodity markets are, at the end of the day,markets and hence they should have a common regulator because this will streamline decision making and potentially trigger new products. Great!

And there comes my third question, why then are we trying to create multiple entities for microfinance and enterprise finance? Where is the coherence in “strategy”?

Instead of seeding new ideas, would it not be better to energise the NABARD and SIDBI to take the word “Development” in their names seriously for their respective sectors? To adopt innovation and  shake away  some of the bureaucracy that binds them down? To adopt proactive measures to tackle the problem of access to finance for small businesses?

And please, for the sake of humanity, why should a bank promoting entrepreneurship favour only the scheduled castes and tribes? Favour all enterpreneurs, if you can. Nobody does that in our country.

(Edited on 9th March, 2015 to add an article on the same topic by noted journalist/author Mr. Tamal Bandyopadhyay. He seems to point out similar concerns.)

Will de-listing of Fruits & Vegetables from APMC Act affect price?

Recently, the Indian Central Government requested all State Governments to delist fruits and vegetables from the Agriculture Produce Market Committees Act (APMC Act). This was to address rising price in fruits and vegetables. I was trying to understand how this would affect things going forward. A basic analysis of what I think is going to happen is given below.

Currently, the APMC Act makes it mandatory for farmers to sell their produce only to licensed merchants at mandis set up by state agriculture marketing boards. So, it is being said that delisting will eliminate these licensed merchants or middlemen who set up a cartel and raise the prices for super normal profits. So, farmers will now be able to sell directly to retailers or food processors and hence the buyers will get fruits and vegetables at a lower price.

In addition, commissions earned by the agents, mandi tax, octroi, VAT or sales tax and inter-state movement charges add to the price of fruits and vegetables. Delisting from APMC Act would enable sale of fruits and vegetables to happen without payment of commissions, mandi tax/cess. This means that delisting would certainly wipe out state revenues from mandi tax/cess and potentially reduce price but will it enable farmers to sell directly to consumers/buyers and avoid traders/commission agents?

Does the farmer sell at the APMC market even today? The Planning Commission says that 75% of farmers sell their produce at the farmgate to traders, aggregators and sometimes contract buyers. In earlier initiatives taken in Bihar or even Andhra Pradesh and a few other states, doing away with APMC Act restrictions or setting up of Farmer Markets have not been able to eliminate middle men completely and that is due to practical issues. It is mostly the aggregators or agents who take farmer certificate and sell under their name in the farmer market. For the sake of convenience, a group of farmers generally find somebody from the village and sell their produce to him and he gets a license to operate in this market as a “farmer”. This is to arrive at a commercially viable and practical aggregation volume for transportation and time saving.

This means that under current situation, farmers are not reaching the APMC mandi anyways because of practical difficulties. How will they reach the consumer directly now when the fruits and vegetables have been delisted?They will need intermediaries or they will need consumers to reach out to them directly. Consumers will not be able to reach farmers directly. Fact is, they will need intermediaries, be it the local aggregators or the corporate retailers/buyers.

Question is, how do you ensure that the intermediaries do not form a cartel that jacks up prices for buyers once again? Will this deregulation reduce strength of cartels or lead to an increase in their power? In the past, states have delisted fruits and vegetables but haven’t succeeded in breaking cartels. So it is unlikely that cartels will get demolished just by delisting. The cartel will weaken only when alternate channels are built to enable competition. Delisting enables corporate buyers to buy directly without having to depend upon intermediaries or having to enroll at the mandi and having to pay mandi cess. So, this will increase competition (at the cost of state revenues) but how will they reach farmers immediately? It is obvious that It is not going to immediately cool off the prices and it needs long term efforts in addition to just delisting. Unless multiple mutually independent market players enter the market, the pains of having to deal with high price will continue.

Another key component of the high price is spoilage that happens due to lack of appropriate cold chain facilities and change of multiple hands. So, it is important that this delisting initiative is followed by building physical infrastructure and competitive markets.

Such infrastructure has to be built by both private and public resources. Through policy stability and direction, large corporate buyers will now be encouraged to set up procurement networks deep into producing locations. It is also important that the state continues to provides alternate channels to farmers by building cold chain and storage facilities and supporting development of multiple options of storage and sale. Unless this is done, the corporate buyer may form one more cartel.

Let’s face it. Farmers will not reach retailers or consumers directly. We will need intermediaries, be it local aggregators or corporate buyers. We have to take steps to improve efficiency in movement of fruits and vegetables through these intermediary channels to ensure quality at the right price.

It is easier said than done. Delisting of fruits and vegetables is the first, easy to implement step (though politically difficult). It must be followed by a series of difficult to implement steps that promote appropriate infrastructure to improve efficiency and ensure availability of fruits and vegetables at the right price. Hopefully, after paying the appropriate mandi taxes. 

What do you think?



Renewable Energy.


Medical Technologies. (Detection and treatment)

Agriculture.- Food production & Food preservation.

That is where breakthrough innovation is required. We will possibly see breakthrough innovations in these areas (in that order) in future. Something similar to what we have seen in case of communication technologies over the past decade.

While Renewable Energy and Medical Technologies have received venture investments, Agri-Tech and Water are still to see mainstream venture capital investments.