Key flaws in the Mudra scheme need to be fixed

Recently, RBI Deputy Governor MK Jain, raised concerns over the growing level of bad loans from the Pradhan Mantri MUDRA Yojana, a scheme announced by the BJP government in April 2015. Under the scheme, MUDRA (Micro Units Development and Refinance Agency) was set up to provide refinance support to last mile financiers such as banks, MFIs and NBFCs for lending to small entrepreneurs having loan requirement up to ₹10 lakh. As of November, over 21 crore loans worth around ₹10.4 lakh crore have been sanctioned under the Mudra scheme since inception. Between FY16 and FY19, loans disbursed under the scheme have grown by over 30 per cent annually. While the massive drive by the government was intended to address the funding need of small businesses, the unbridled growth has impacted the quality of loans, warranting a closer scrutiny.

According to data collated from various responses to queries raised in Parliament in recent months, about 2 per cent of loans sanctioned or ₹17,651 crore of loans have turned bad since the inception of the scheme (up to March 2019). While the NPA figure at the aggregate level may not seem alarming, bad loan levels at some individual banks aren’t comforting. The top five banks constitute nearly half of the total bad loans reported under Mudra and for some of these banks, the NPAs are 8-9 per cent of loans disbursed. There has also been a jump in bad loans over the past two fiscals — from 2.58 per cent of loans disbursed in FY18 to 2.68 per cent in FY19 — which indicates the growing stress in these loans. There have also been increasing instances of frauds reported at public sector banks. Some reports also suggest that bad loans have risen significantly over the past six months, particularly in PSBs. Loans under Mudra fall under three categories — Shishu (up to ₹50,000), Kishor (₹50,000 to ₹5 lakh) and Tarun (₹5-10 lakh). Worryingly, the rise in bad loans in the latter two categories — which account for nearly half the total loans disbursed so far — has been reportedly sharper.

The RBI flagging off the potential risk and nudging banks to streamline the appraisal process is not enough to address the looming issue, particularly in a worsening economic environment where defaults from small businesses could rise rapidly. The regulator will have to dig deeper into bank-wise numbers to assess the system-wide implications. Above all, a re-think on the inherent flaws in the Mudra scheme is critical. It is evident that setting huge targets for PSBs under Mudra has led to bigger set of issues. Shoddy appraisal systems and end-use monitoring practices at PSBs appear to be one of the key reasons for the quick deterioration in the quality of loans. A shift away from such prescriptive and targeted lending is important. Providing the necessary thrust to MFIs and small finance banks that have been able to supply micro credit in a more profitable way will be imperative.

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