MUDRA Loans: What Went Wrong?
Dr B Yerram Raju  and  J Sitapati Sarma 02 December 2019
The concerns on the rising non-performing assets (NPAs) in Micro Units Development and Refinance Agency (MUDRA) loans have been red flagged by the regulator, Reserve Bank of India (RBI) starting with Dr Raghuram Rajan, followed by the current governor Shaktikanta Das and MK Jain, deputy governor of RBI.  This only demonstrates the seriousness of the issue.  
 
The NPAs in MUDRA saw a steep jump of 126% in one year – an increase from Rs7,227crore in FY2018 to Rs16,481 crore in FY2019, with the number of infected accounts totalling 30.57 lakh. India Ratings and ICRA estimated the NPAs under MUDRA between 10-15% as compared to 5.39% in March 2018.
 
 Since the Vijay Mallya scam, surging corporate NPAs are now in the company of their less endowed MUDRA borrowers propped up by the government and so economy slowdown should have nothing to contribute to this sordid story.
 
What went wrong with MUDRA loans?  
 
Ever since the scheme has been flagged off in April 2015, the targets were not only set but closely driven, breathing down the necks of the banks by the ministry of finance, to emphasise the importance attached to the scheme.  Bankers have exhibited more than the required enthusiasm and competed with one another to achieve the targets to dwarf their peers before the Delhi bosses.  
 
While massive numbers are to be achieved within set deadlines, it appears that the appraisal was given a go-by as hinted at by Mr Jain, the deputy governor of RBI, urging the banks to monitor the repayment capacity of borrowers before disbursement.  All the targets, which increased year after year - were achieved by not only the public sector banks (PSBs) but other participants too.  
 
The total sanctions under MUDRA till March 2019 since inception stood at Rs8.92 lakh crore.   The speed at which these loans are sanctioned can be noticed from the fact that Rs18000 crore worth of sanctions were pushed during the last 8 days of FY2019 to achieve the target.  During FY2019 an amount of Rs970 crore was sanctioned per day by all MUDRA lending institutions together.  
 
Coverage of these loans under the Credit Guarantee Fund for Micro Units (CGFMU) up to Rs10 lakh could be another reason for sloppy appraisal. It is amply clear that these are push loans without proper appraisal and due diligence of the borrower.  Informed sources say that bankers chose this route to ‘evergreen’ (a loan that does not require the principal amount to be paid off within a specified period of time) their small ticket loans!  
 
The numbers reveal different facts, however.  Of the total sanctions, the new loan sanctions hovered around 26%, barring the first year of introduction when it stood at 36%.  Can we draw a conclusion that the renewals/existing loans accounted for a larger share probably owing to the evergreening process of existing loans with increased limits?  More than 70% of the loans are sanctioned under ‘Shishu’ (not exceeding Rs50,000), considered least risky in the portfolio.  
 
While banks can finance up to Rs10 lakh under the scheme, they preferred to keep the average ticket size to less than Rs1 lakh.  To be more precise, the average ticket size of the MUDRA loan increased from Rs39,405 in FY 2016 to Rs52,739 in FY2018.  State wise disbursals also indicate unequal distribution that needs correction too.
 
In a way it is a blessing in disguise because the slippages and NPA accretion could otherwise have been higher.  But the only issue that remains in such small ticket loans is the adequacy of finance and the resultant viability.    
 
During the current fiscal 29 million loans were disbursed, amounting to Rs1.41 trillion, showing a slight slowing down, against Rs3 trillion in the previous fiscal. Not even 2% has been sanctioned to the manufacturing enterprises because that involves onsite verification and follow up.  
 
The positive part of the story is employment creation.  As per an unpublished survey a total of 11.2 million new jobs were created in 2015-18, of which 5.1 million were of new entrepreneurs. If the government were not to push for targets, banks would not have touched this clientele with a barge pole. It is however doubtful whether, given a free hand, the banks would improve the quality of portfolio, since NPAs are seen surging ahead as everywhere else they had a free hand. . The banks’ eye on quality has much to do with their knowledge, skills and attitude. All the three seem to be at a low ebb.
 
The JanDhan scheme, accompanied by savings and insurance, and MUDRA, led by credit with refinance and guarantee, are two schemes of the most acclaimed inclusive agenda of the NDA government. The micro-finance institutions (MFIs) and the small finance banks that also lent heavily along with the public sector banks (PSBs) in MUDRA realized that they did not have much to lose as the money to lend came from the refinance window while the post-disbursement losses are guaranteed. Since the funds to MUDRA are from the Union Budget, the losses arising from the scheme devolve on the taxpayer. 
 
RBI would do well to commission a detailed study of the portfolio and take corrective measures to ensure that the inclusive agenda of the government would not get undermined and the taxpayer is saved of the undue burden of the scheme.
 
(Dr B Yerram Raju is an economist and risk management specialist while Sitapati Sarma is a retired general manager of SBI and the present chief operating officer of the Telangana Industrial Health Clinic Ltd. The views are personal.)
Comments
Sandeep More
2 years ago
Probably the beneficiaries are expecting loan waivers, given that the political leaders keep on falling upon themselves to do the needful, that too very consistently. Most of the beneficiaries could be of the opinion that such loans are sanctioned so as to get an opportunity to waive them off at the right time.
tanay
2 years ago
Which bank has the highest mudra loan npa?
B. Yerram Raju
Replied to tanay comment 2 years ago
SBI and PNB
Ramesh Poapt
2 years ago
of of many big bang syndrome!
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