Here is a warning shot from the banking regulator Reserve Bank of India (RBI)! Micro enterprises' sector is building up as a future cause of headache for the banking industry. The regulator has raised a red flag on the spike in non-performing assets (NPAs) under the Pradhan Mantri Mudra Yojana and has disclosed that bad loans under the scheme have risen to alarming Rs. 11,000 crore in just three years.
Notably, MUDRA (Micro Units Development and Refinance Agency) scheme was launched on April 8, 2015. Under the scheme, banks are required to finance micro and small entrepreneurs for up to Rs. 10 lakh. Basically loans are granted under three categories – Shishu, Kishor and Tarun. Loans upto Rs 50,000 are provided under Shishu category. The amount is enhanced upto Rs 5 lakh under Kishor category and Rs 10 lakh for Tarun category of entrepreneurs. The women entrepreneurs are specially focused under the Yojana.
Before deliberating upon the issue of mounting default in Mudra scheme, let me share some facts and figures of the scheme. As per the annual report of the Mudra scheme, total disbursements under the scheme stood at Rs. 2.46 lakh crore in 2017-18. Out of this, 40 per cent were disbursed to women entrepreneurs and 33 per cent to social categories. More than 4.81 crore micro borrowers have benefited through the PMMY scheme during the year FY18.
Why defaults are taking place in loan categories under Mudra scheme? Actually the design of the scheme has come under sharp criticism from the banking community. The scheme does not make it mandatory for the borrowers to submit collateral security and banks have clear instructions not to insist for it.
There was, of course, enthusiasm among the banks when the Prime Minister Narendra Modi unveiled the Yojana three years back. First, the ticket size of the loan facility was not big. Second, the beneficiaries were going to be small enterprises segment, which is a thriving segment in the overall economic scenario of the country. And thirdly, default scenario in such segment was not worrisome and most of the times such default was not willful.
So, in the initial stage, this scenario gave banks confidence that they were not landing into any high credit risk arena and collateral-free loans didn't bother them. Above all, they were driving the prime minister's initiative to win praise of the top political leadership of the country.
Now, the expanding bad loan scenario in Mudra loan segment revealed by the RBI is an indication that this Yojana is fast becoming an easy tool to swindle bank's money by willfully defaulting in repayments. It also seems to have punctured the Prime Minister Narendra Modi's claim that Yojana had transformed the lives of the poor in the country. It may have strengthened the beneficiaries economically, socially and provided them a platform to succeed, but it has started giving tough moments to the banks as defaults are on the rise. Since there is no collateral security in such loans, banks are caught on wrong foot as they cannot lay hand borrower's assets to recover their dues.
Here it makes a sense to mention about the warning shots from the former RBI governor Raghuram Rajan in last September regarding 'next crisis' hitting the banking industry because of the bad design of Mudra scheme. He had elaborated in his 17-page note to the Lok Sabha Committee on Estimates that loans under the government's popular flagship scheme Pradhan Mantri Mudra Yojana and the Kisan Credit Card needed to be examined "more closely" for potential credit risk.
Now, what should be done to arrest the mounting bad loan scenario under Mudra Yojana?
The first thing is to infuse confidence among the banks that future loaning won't fell in the NPA basket. Let the banks be allowed to follow the banking principles, which means proper appraisals of loans under the scheme. For this, the government agencies have to stop pressuring the banks to sanction loans to anyone who don't have a genuine business plan.
In Mudra there is preference for women entrepreneurs. This aspect has been misused as the influential have been pushing a pool of proxies, who claim to turn entrepreneurs. These proxies being backed by influential in the political system make banks to dance at their tune. These proxies have to be stopped. Besides, the government should immediately stop setting ambitious loan targets to banks.
(The views are of the author and not that of the institution he works for)