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Mudra scheme for NBFCs – Special Refinance window

Mudra scheme for NBFCs

The entire banking sector has been under severe liquidity stress, following the IL&FS bankruptcy along with many leading players like DHFL reporting defaults. Taking into consideration these loopholes the Finance Industry Development Council (FIDC) said that NBFC should be allowed to avail the refinance facility. Earlier where the NBFC sector used to witness a growth of 15% in loan disbursement, is now facing a liquidity crisis with a massive drop-down in loan disbursement for about 19% in the 4th quarter of FY19.

In mid-2018, A series of defaults by entities from the Infrastructure Leasing & Financial Services (IL&FS) group was the immediate trigger behind the crisis, resulting this the association sought to distinguish NBFCs from housing finance companies (HFCs), whose practice of borrowing short-term funds to originate long-term mortgage loans is believed to be one of the reasons behind the drying up of liquidity in the system and increased risk aversion on the part of banks.

What is MUDRA Scheme?

MUDRA stands for Micro Units Development and Refinance Agency Ltd which provides refinance support to the Banks/NBFCs/MFIs for lending to micro units having a loan requirement up to Rs 10 lakh to provide refinance support to micro-business under the scheme of Pradhan Mantri Mudra Yojna.

Mudra Scheme provides 2 types of funding support:

  • Micro Credit Scheme for loans up to 1 lakh finance through MFIs.
  • Refinance Scheme for Commercial Banks / Regional Rural Banks (RRBs) / Small Finance Banks / Non-Banking Financial Companies (NBFCs).

Also, Read: KYC Policy for Housing Finance Companies

What are the Eligibility Criteria of MUDRA Scheme?

For refinance, the institutions expecting to partner with MUDRA will have to be registered with MUDRA.

Below mentioned points are the eligibility criteria for availing the MUDRA Scheme –

  1. Banks like Commercial Banks, Regional Rural Banks (RRB), Small Finance Banks (SFB) and Non-Banking Financial company NBFCs are eligible to avail of refinancing support from MUDRA for financing micro-enterprise activities.
  2. The refinance is available for term loan and working capital loan up to an amount of 10 lakh per unit.
  3. The eligible banks/NBFC who comply with the requirements as specified under MUDRA Scheme can avail of refinancing from MUDRA for the loans given by them for eligible MUDRA compliant activities under Shishu, Kishore and Tarun categories.
  4. NBFCs/ MFIs may consider extending additional facilities to encourage women entrepreneurs which include interest reduction on their loan.

HIGHLIGHTS – At present, to MFIs / NBFCs, who are providing loans to women entrepreneurs under MUDRA scheme extends a reduction of 25bps in its interest rates.

According to Surendra Srivastava, chief financial officer, Mudra, while the growth this fiscal may not be as stellar as FY18, it will not be very poor either. He explained that since banks have started purchasing portfolios from NBFCs, the liquidity squeeze has somewhat been relaxed. “The NBFCs are getting cash in exchange for their existing loans being sold to banks and these funds are being used for new loans.

What are the Benefits of Mudra Scheme for NBFCs?

In June 2003 in its, the Parliamentary standing committee on finance in its 45th report in June 2003 (relating to the Financial Companies Regulation Bill, 2000) had recommended setting up of a new refinance institution for NBFCs. By creating a refinance window under Mudra scheme, it ensured sufficient bank funding to NBFCs at a reasonable cost and is helping the banks to meet their PSL targets. It is also helping the NBFC sector in providing long term liquidity and stability.

By making the issue through an easy to operate and less costly procedure, NBFCs can be allowed an on-tap facility for issuance of NCDs to the retail market.

FIDC said the industry has asked for a dedicated refinance window for NBFCs along the lines of the National Housing Bank to tackle the liquidity deficit as a long-term measure which ultimately provides refinance to HFCs. An AIF would help channelize the flow of institutional funds to NBFCs, while the on-tap mechanism for raising retail money would offer a cost-effective fund-raising mechanism.

Further, by availing refinance from Mudra for on-lending to small- and medium-sized NBFCs, NBFCs should be allowed to act as aggregators. A refinance window will give comfort to NBFCs that there is some option available to get liquidity and will also give confidence to banks to lend to the sector.

For the FY 2018, NBFCs not only met their Mudra target of ₹ 9,050 crore but their sanction for the year was five times high from the previous year.

Read More: Compliance of Housing Finance Companies in India


Mudra scheme has made a lasting impact on the development of the NBFC sector and helped fuel the economic growth of the nation. The main focus of MUDRA scheme[1] is to rekindle entrepreneurship by nurturing and uplifting the standards of the institutions in the financial sector which in return provide easy and innovative access of credit to deserving entrepreneurs without any complex formalities attached.

Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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