Why interest subvention under Mudra scheme does not offer much respite

In a bid to offer some relief to small businesses, the Centre on Thursday announced interest subvention for Mudra loans under the Shishu category. But how it will actually aid small businesses struggling to cope with the lockdown and resume activity is unclear.

For one, the interest subvention of 2 per cent is for prompt repayments for a period of 12 months. In the current scenario, where many small businesses have opted for the three-month moratorium owing to their inability to repay their loans, offering a carrot for prompt payments can hardly be of any relief.

The Pradhan Mantri MUDRA Yojana, announced by the Modi government in April 2015 was intended 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. Hence these loans are for very small businesses (average ticket size in FY19 at about ₹53,000).

Loans under Mudra fall under three categories — Shishu (up to ₹50,000), Kishore (₹50,000 to ₹5 lakh) and Tarun (₹5 lakh-10 lakh). The average ticket size of loans under Shishu is much lower at about ₹27,000.

Amid the lockdown these micro businesses have been the worst hit. Hence how the interest subvention of 2 per cent for prompt payment can aid these businesses is hard to understand. As of November last year, over 21 crore loans worth around ₹10.4-lakh crore have been sanctioned under the Mudra scheme since inception. Of these 18 crore accounts pertain to the Shishu category.

Then there is the issue of sharp rise in bad loans under Mudra in the recent past. In the current scenario of worsening economic environment, NPAs could rise sharply.

According to data collated from various responses to queries raised in Parliament in recent months, about ₹22,550 crore of loans have turned bad since the inception of the scheme (up to March 2019). NPAs under PMMY as on March 2019 for PSBs were 3.76 per cent of the amount disbursed under the scheme.

While the NPA figure at the aggregate level may not seem alarming, the bad loans situation at individual banks is not comforting. The top five banks constitute nearly half of the total bad loans reported under Mudra and for some of them, NPAs are about 8-9 per cent of loans disbursed.

With small businesses taking a sharp knock owing to Covid-induced disruption, bad loans are set to rise in the coming months. Hence the Centre’s interest subvention for prompt repayments may lend little comfort to borrowers.

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