Prime minister Narendra Modi on Wednesday launched Mudra Bank, which will provide credit of up to Rs 10 lakh to small entrepreneurs and act as a regulator for 'micro-finance institutions' (MFIs).

The Micro Units Development Refinance Agency  or the Mudra Bank comes under  Pradhan Mantri Jan Dhan Yojana  and it will frame policy guidelines for micro enterprise financing business and registration of MFI entities as well as their accreditation and rating. It will also lay down "responsible financing practices" to ward off over indebtedness and ensure proper client protection principles and methods of recovery, besides development of standardised set of covenants governing last mile lending to micro enterprises.

There are about 5.77 crore small business units. These units find it difficult to access credit from the regular banking system.  This is where Mudra comes in.

The Bank will nurture small businesses through different stages of growth and development of businesses termed as Shishu, Kishor and Tarun.

Shishu: This is the first step when the business is just starting up. The loan cover in this stage will be up to Rs 50,000.  Kishor: In this stage business, the entreprenuer will be eligible for a loan ranging from Rs 50,000 to Rs 5 lakh.  Tarun: This last stage of growth envisages loans for upto Rs 10 lakh.

In his budget speech, finance minister Arun Jaitley had proposed the Mudra Bank with a corpus of Rs 20,000 crore, and credit guarantee corpus of Rs 3,000 crore.

"Providing access to institutional finance to such micro/small business units/enterprises will not only help in improving the quality of life of these entrepreneurs but also turn them into strong instruments of GDP growth and employment generation," the finance ministry said in a statement.