Calcutta, Jan. 17: The finance ministry may have to explore additional source of funding beyond unused priority sector lending of commercial banks for Micro Units Development Refinance Agency (Mudra) Bank to meet credit refinancing demand.

Mudra Bank started its operations in April 2015 as a refinancing agency for micro units and small entrepreneurs with a credit offering between Rs 50,000 and Rs 10 lakh. It has been allotted a corpus of Rs 20,000 crore from the unused priority sector lending of commercial banks.

According to bankers and market analysts, the corpus may not be adequate for future refinancing considering the growing borrowing need of small entrepreneurs.

The demand is evident from the amount of credit offtake under Mudra scheme in the first three quarters of the fiscal - Rs 71,312 crore of a target of Rs 1.2 lakh crore by March 2016.

Already 1.73 lakh crore borrowers have taken credit and the industry expects a demand for credit refinance to grow in the coming quarters.

Religare Institutional Research in a report on Mudra Bank said the refinancing institution was competing with the likes of Nabard and Sidbi for a pie of the unused priority sector lending. Both these institutions are covering a much wider gamut of borrowers in the agriculture and MSME spaces and their refinancing needs are also high.

The research company said in case banks reached a higher priority sector target, the amount of unused funds would go down, lowering the share of funds available with a bank.

Mudra Bank CEO Jiji Mammen said based on the growing credit demand by small entrepreneurs, alternative fund sources would have to be explored to facilitate future refinancing.

"The use of unused priority sector lending is an initial arrangement," said Mammen on the sidelines of a microfinance summit organised by the Association of Microfinance Institutions, West Bengal.

According to analysts, alternative channels may include market borrowing or borrowing through international route, but more clarity is needed from the government. Mudra has so far refinanced credit worth around Rs 1,500 crore comprising both banks and microfinance institutions.

Sources said these institutions were cautious on credit refinance from Mudra on account of a cap on spreads. For instance, an NBFC-MFI usually earns a spread (interest charged - cost of funds) of 11-13 per cent on lending rates of 22-24 per cent. If they get their loan refinanced from Mudra, the spread is capped at 6 per cent.