What is the problem?
- Former RBI Governor Raghuram Rajan, in his report to Parliament recently, said that while non-performing assets stemming from corporate loans are a current problem, the government should focus on sources of the next crisis. In particular, he warned, the government should refrain from setting ambitious credit targets or waiving loans.
- He called out Mudra loans as those with potential credit risks. He particularly flagged the culture of meeting targets by rushing through due process and then offering populist sops such as mass waiver of loans. “Credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs.
- Both Mudra loans as well as the Kisan Credit Card, while being popular, have to be examined more closely for potential risk. The Credit Guarantee Scheme for the MSME run by the SIDBI is a growing contingent liability and needs to be examined with urgency,” he said in his note.
What is Mudra?
- The Micro Units Development & Refinance Agency Ltd. (Mudra) was set up in 2015 under the Pradhan Mantri Mudra Yojana (PMMY) to help develop and refinance the ‘non-corporate business’ sector by supporting finance institutions that lend to micro/small business entities engaged in manufacturing, trading and service activities.
- It is aimed at using micro finance as an economic development tool that helps to provide income-generating opportunities to the people at the bottom of the pyramid, targeting small manufacturing units, shopkeepers, fruits and vegetable vendors, truck and taxi operators, food-service units, repair shops, machine operators, artisans and food processors.
Is repayment a challenge?
- Critics of the scheme say that too many best practices in loan origination have been neglected while authorising and disbursing loans. Earlier this year, the CBI registered a case against a former official of Punjab National Bank for alleged abuse of official position in sanctioning and disbursing 26 Mudra loans amounting to ₹65 lakh.
- Even if loans are sought by business owners genuinely seeking growth and bankers disburse them with an eye on economic development, ensuring repayment is still a challenge.
- First, these loans are unsecured — a collateral that could protect the interests of the bank is not required, unless an asset that is purchased can itself serve as collateral.
- The scheme is meant for those who need small amounts, but do not have access to such funds, but the very nature of the business of such borrowers is susceptible to volatility and annual cycles, not to mention the itinerant ways of some business owners, such as vegetable vendors.
- They may choose one location for their place of business on a day, and another elsewhere in their city the next day.
- Further, the public banking system may not be staffed for work this may entail. When it comes to collection, bank staff may choose to go after one loan with outstanding of ₹10 lakh, for example, rather than 10 loans of ₹1,00,000 each.
What is the average loan size?
- Loans under the Mudra scheme are disbursed under three heads, starting from loans up to ₹50,000 and going up to ₹10 lakh. About ₹2.53 lakh crore had been sanctioned for about 4.81 crore PMMY loans under all three heads in the financial year 2017-18. The average size of a sanctioned loan stood at Rs. 52,706 for the year.
- The State Bank of India recently said it had disbursed Rs. 28,556 crore under the PMMY scheme in FY18. Non-performing assets arising out of this scheme is about 5.2% for India’s largest bank, a figure that the bank views as being under ‘acceptable limits’.
- The website dedicated to PMMY does not indicate the quantum of loans that have soured or details of collections. In May, the government said a total of ₹6 lakh crore had been disbursed to 12 crore beneficiaries under the Mudra scheme since its inception in 2015. Of these, 3.25 crore were first-time entrepreneurs and 9 crore borrowers were women.