Showing posts with label MUDRA. Show all posts
Showing posts with label MUDRA. Show all posts

Monday, March 30, 2020

Impact of Covid -19; Review of Measures taken



RBI in its Monetary Policy statement on the 27th March 2020 front-ended the effort of banks through pumping liquidity, 3-month moratorium on term loan instalments, working capital while interest will continue to accrue during the moratorium period with a further clarification that instalments will include the payments falling due from March 1, 2020 to May 31, 2020: (i) principal and/or interest components; (ii) bullet repayments; (iii) Equated Monthly instalments; (iv) credit card dues; review of working capital limits of all enterprises. 3% CRR recommended by Narasimhan Committee, Tarapore and Ashok Lahri at different points of time has been announced.

Interest will continue to be charged on the EMIs and they would to that extent enlarge the instalments that follow the moratorium. To expect the industry to recover immediately after the lockdown period is over will be an overestimation. McKinsey says:” Restarting production facilities can be more challenging than shutting them down. It requires a thoughtful approach to revive the supply chain, match volume to actual demand, and, most importantly, protect the workforce.” They require minimum six months to get back into the full supply chain. Banks’ sagacity to reassess working capital lies here. Banks should not cut down the limits because the size of the Balance sheets of all firms will be downside of the previous years including their own.

Future lending shall be cash flow based and not Balance sheet ratio based or even just turnover based (Banks are asked to extend minimum of 20% of projected turnover while most have adopted this as the maximum and this includes SIDBI).

RBI February data indicates that as of January 2020 credit growth to agriculture and allied activities decelerated to 6.5% from 7.6% in January 2019; to industry more than halved during the same period; to services sector decelerated to 8.9% from 23.9% whereas for personal loans it grew by 16.9%. This position prevails despite liquidity infusion measures during the last two monetary policy initiatives. Therefore, risk aversion and not liquidity is the problem with banks.

The already risk-averse banks can hardly lend during this period of lockdown seeing temporary shutdown of 90% enterprises. They can only provide online comfort following the policy announcement, al bait for three months! For a running industry to increase capacity is easier than a re-opened industry after lockdown. Further, investment required after re-starting is also going to be much more than now. Therefore, banks must prepare to lend more aggressively immediately after the current period. But can they move away from aversion to appetite in taking legitimate credit risk, without improving their lending infrastructure?

A few special efforts that still beg attention are:
·       Banks to stop all SARFAESI proceedings and developing forbearance for the manufacturing MSEs.
·       Extension of NPA threshold to 180 days, effective January 2020 quickly that will keep accounts standard for any further booster doses to flow to the industry.        
T    
Special Mention Accounts 1 & 2 categories will also need uniform forbearance.
·       Unfunded limits – LCs, Guarantees, ECGs falling due between January and May 2020 should not be revoked for non-compliance but their periods extended by another six months. RBI directive is imperative.
·      
A       All viability tests shall be done by State Government accredited agencies
·       GST should be reduced to 5% till the end of December 2020 for all the enterprises that would submit their quarterly returns as required under law, even if at exempted thresholds. Review of impact should be based on an evaluation study by all the Industry Chambers.
·       All MSMEs that maintain record of manpower employed verifiable with EPF and ESI registrations.
·       All MSMEs may be permitted to engage contract labour with the social security burden absorbed by the State Government on reduced commitments annually by 20% provided they all are digitized for all transactions.
·       Power Tariff should be cut by 50% for all the manufacturing enterprises provided they are all digitized and registered under Udyog Aadhar or TSiPASS.
·       All MSME Funds should be maintained and monitored by the DC-MSME through NSIC instead of SIDBI.

GoI may focus more on cleaning up the financial sector with a sense of urgency to render its services effectively in tackling this uncertainty effectively. At one end, cash relief from the exchequer should flow to all digitized Jan Dhan and Mudra loan accounts and at the other end, credit shall pump prime the economy with responsible and timely deployment post lockdown.

More digitized developed economies are redirecting their efforts to containing the spread and holding people in discipline using WhatsApp, digital alarms at the Carona Control Rooms etc.
South Korea has transferred cash to all the SMEs to pay for their labour for one month. US has announced a $2 trillion package to combat the new war. Several nations across the world – with 196 affected by this monster Carona - are seriously contemplating the relief packages. G-20 announced $5trn relief package. For once everyone stopped thinking of fiscal deficit. Extraordinary problems require extraordinary solutions.

No time for Hobson’s choice. Saving lives is more important than saving the economy, no doubt. But preparing the economy to respond to the post COVID-19 very effectively also brooks no let-up in efforts.
*This is part of the article published on the 30th March in Telangana Today with some additions.  A Response write up to the CII.

Tuesday, December 3, 2019

What went wrong with Mudra Loans?



Speed Thrills but Kills Too – A Story of Mudra Loans
B. Yerram Raju* & J. Sitapati Sarma**

The concerns on rising NPAs in Mudra Loans are red flagged by the Regulator starting from Shri Raghuram Rajan, followed by current Governor Shri Shaktikant Das and Dy Governor of RBI.   This only manifests the seriousness of the issue. 

The NPAs in Mudra saw a steep jump of 126% in one year – increased from Rs. 7227crore in FY 18 to Rs. 16481 crore in FY 19 with number of infected accounts totaling to 30.57 lakh. India Ratings and ICRA estimated NPAs under MUDRA between 10-15% as compared to 5.39% in March 2018.  Since the Mallya debacle, surging corporate NPAs are now in the company of their less endowed MUDRA borrowers pepped up by the Government.  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 over the necks of the banks by the Ministry of Finance, to impress the importance attached to the scheme.  Bankers have exhibited more than required enthusiasm and competed with one another  to  achieve  targets to dwarf the 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 by the Deputy Governor urging banks to monitor repayment capacity of borrowers before disbursement.  All the targets – increased year after year - were achieved by not only PSBs but other participants too. 

The total sanctions till March 2019 since inception stood at Rs. 8.92 lakh crores.   The speed at which these loans are sanctioned can be noticed from the fact that Rs.18000 crore worth sanctions were pushed during the last 8 days of FY19 to achieve the target.  During FY19 an amount of Rs.970 crore was sanctioned per day by all Mudra Lending Institutions together. 

Coverage of these loans under Credit Guarantee Fund for Micro Units (CGFMU) up to Rs.10 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’ their small ticket loans!  

The numbers reveal some different facts.  Of the total sanctions, the new loan sanctions hovered around 26% barring the first year of introduction where it stood at 36%.  Can we draw a conclusion that the renewals/existing loans accounted for larger share probably owing to evergreening process of existing loans with increased limits?  More than 70% of the loans are sanctioned under “shishu’ (Not exceeding Rs.50000), considered least risky in the portfolio. 

While Banks can finance up to Rs.10 lacs under the scheme, they preferred to keep the average ticket size to less than Rs. 1 lac.  To be more precise, the average ticket size of mudra loan increased from Rs.39405 in FY16 to Rs.52739 in FY18.  Statewise disbursals also indicate unequal distribution that also needs correction.

One way it is blessing in disguise; otherwise, the slippages and NPA accretion could have been higher.  But the only issue that remains in such small ticket loans is the adequacy of finance and resultant viability.   

During the current fiscal 29 million loans were disbursed amounting to Rs. 1.41 trillion, showing slight slowing down, against Rs. 3 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 new entrepreneurs.   If government were not to push for targets, Banks would not have touched these clienteles with a barge pole. It is however doubtful whether banks given a free hand would improve the quality of portfolio as everywhere else they had the free hand too, NPAs are surging ahead. Banks’ eye on quality has much to do with their knowledge, skills and attitude. All the three seem to be at low ebb.

Jandhan accompanied by savings and insurance and MUDRA led by credit with refinance and guarantee are two schemes of the most acclaimed inclusive agenda of NDA government. MFIs, Small Finance Banks also lent heavily along with PSBs in MUDRA realized that they did not have much to loose as the money to lend came from refinance window while 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.

Yerram Raju is an economist and risk management specialist and Sitapati Sarma is retired General Manager of SBI and present Chief Operating Officer of Telangana Industrial Health Clinic Ltd. The views are personal.
Published in Money Life on 2,12,2019 www.moneylife.in

Thursday, October 10, 2019

Institutions loosing their relevance


Agri, MSME DFIs are failing to meet their objectives

The focus needs to shift from public sector banks to NABARD and SIDBI, whose functions greatly differ from their intended role

When one sees high inflation, the RBI comes to mind. When capital markets misbehave, SEBI is on the radar. When an insurance problem surfaces, the IRDA comes into the picture. These are institutions with proven credibility.

But when credit does not flow to agriculture or when farmers commit suicide, why does NABARD (National Bank for Agriculture and Rural Development) not come to mind? Why do farmers go to the government for a resolution? Similarly, when MSMEs do not get credit on time or do not get the services promised, why is SIDBI not under scanner? Why should the RBI still have a department to resolve issues relating to agriculture and MSMEs and prescribe priority sector boundaries, despite these other institutions?
Agricultural credit

NABARD, a statutory corporation, was set up in 1982, to take up the work of the Agricultural Refinance and Development Corporation (or, Agriculture Refinance Corporation, till 1970), as well as some functions of the Agriculture Credit Department.

The NABARD Act was passed in 1981. Its preamble states that it is: “An Act to establish a development bank...for providing and regulating credit and other facilities for the promotion and development of agriculture (micro-enterprises, small enterprises and medium enterprises, cottage and village industries, handlooms), handicrafts and other rural crafts and other allied economic activities in rural areas with a view to promoting integrated rural development and securing prosperity of rural areas, and for matters connected therewith or incidental thereto.”

NABARD is a development finance institution (DFI) established under the statute to serve the purpose of providing and regulating credit and other facilities for the promotion and development of agriculture. It started regulating cooperative credit, but that space was ceded to commercial banks. It also started with regulating RRBs, but most of them merged into larger entities and RRB branches are now mostly seen in urban and metro centres.

When the statute provided for regulation of credit to agriculture, why did the RBI continue to hold the reins? Is it because of lack of confidence in NABARD, or a reluctance to cede control?
The Rural Infrastructure Development Fund is administered by NABARD. Why should NABARD fund States for infrastructure projects, and in the bargain became a banker for the State — not for agriculture and allied activities, rural and cottage industries? It undertakes more treasury business (pure financial operations) than refinancing of cooperative banks and RRBs at very soft rates, and through them, lends to the farmers of all hues. There has been a compromise of objectives, with full concurrence of both the RBI and the government. NABARD’s income comes more from investments than refinancing or development projects.

Commercial lending

Let us see the other DFI — set up under a separate statute in 1989 — the Small Industries Development Bank of India, or SIDBI. There are several Centrally-supported ‘funds’ for the development of small enterprises. But there is no review in the public domain as to how these funds are performing.

The Centre established SIDBI Venture Capital and the ventures funded were of the real estate sector and MFIs. It has no credible record of financing and promoting micro and small manufacturing enterprises or clusters. SIDBI started direct lending sparsely, with a minimum of ₹50 lakh. It did not consider, during the first decade financing, SME marketing activity as a term lending portfolio. Manufacturing enterprises did not get venture capital at a lower cost than the normal venture capital funds.

Commercial objectives continue to govern its functioning. Its regional offices are so autonomous that they do not even consider responding to RBI guidelines. Most of SIDBI’s lending is through collateral securities. It basks under sovereign protection to diversified activities.

Schemes such as MUDRA, CGTMSE, 59Minute Loan are all under its umbrella, albeit indirectly. No one has questioned SIDBI’s way of functioning in relation to the objectives spelt out in the statute: “An Act to establish the Small Industries Development Bank of India as the principal financial institution for the promotion, financing and development of industry in the small-scale sector and to co-ordinate the functions of the institutions engaged in the promotion, financing or developing industry in the small-scale sector and for matters connected therewith or incidental thereto.”

Thus, both the DFIs targeting specific sectors are non-performers in their supposedly dedicated domains. At a time when the Finance Minister is keen on bringing about institutional reforms, she should shift her antenna from mergers to these two DFIs.
The writer is an economist and risk management specialist. Views are personal


Sunday, December 30, 2018

12-point Agenda for the RBI Committee on MSMEs


Pain points for the MSME sector

MSMEs Credit woes in stock
The RBI has its task cut out as it sets about addressing the sector’s credit and viability concerns.

A debate on MSMEs has come alive due to the Centre’s insistence on a regulatory reprieve for the beleaguered sector post GST and post demonetisation. The RBI at its last Board meeting that Urjit Patel chaired, promised to set up a Committee on the MSME sector by the end of this month.
There is an estimate, authenticated by the Centre, that there are around 50 million MSMEs, both registered and unregistered, employing 120 million, second only to agriculture.

Credit crunch
MSMEs contribute 6.11 per cent of manufacturing GDP and 24.6 per cent of services GDP. They also account for 16 per cent of bank lending. Around 8 per cent of credit to manufacturing micro and small enterprises and 13 per cent to medium enterprises are estimated to be gross NPAs.

MUDRA (Micro Units Development and Refinance Ageny) and the ‘59-minute loan sanction’ promises enhanced credit reach to the sector with SIDBI in the lead for both. MUDRA helped banks to push the services sector lending below Rs. 5 lakh significantly.

Field studies reveal that MUDRA loans have been used by several banks to swap a good number of failing micro service sector loans. There is also evidence of moral hazard following adverse selection as several enterprises are non-traceable at the location mentioned in the applications.

In the band of Rs. 5-10 lakh the percentage of loans is less than 20 per cent, indicating preference for a risk free portfolio and lack of interest in the manufacturing sector.
The government has put in place e-Invoice, TReDX, Samadhan, GeM to ensure prompt payment of bills from public sector undertakings and central government departments. Even so, the State PSUs and state government departments continue to delay the bills of MSMEs, leading to NPAs.

A procurement policy has been put in place to provide for preferential purchase from MSMEs, without sacrificing the conditions of quality of goods and services supplied to the buyer.

The process of loan disbursal is also cumbersome. Quite a few banks follow a multi-layered approach to lend to the sector and as a result due diligence suffers. The branch that disburses is also expected to monitor and supervise the credit but does not have the time or manpower for that.

There is hardly any communication between the entrepreneur and the credit authority until an irregularity in the account surfaces.

So given declining credit and growing NPAs, the following 12-point Agenda is a way ahead for the RBI panel:

* Thresholds in priority sector portfolio.
* Credit risk assessment of the MSMEs
* Thresholds for declaring the MSMEs as NPAs — 98 per cent of the portfolio in the fold of proprietors/family owned enterprises in the shape of partnerships, have no exit route of the sort facilitated under the IBC code or the Industrial Disputes Act.
* Revival and restructuring of sick enterprises — Innovative institutional interventions like the Industrial Health Clinics in States that carry the highest numbers of enterprises in this category.
* Cluster Development — Additional lending incentives.
* SIDBI’s Role — Review and Redefine for assuming real leadership role.
* The guarantee mechanism in the shape of the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) needs to be reviewed and redefined.
It has a role conflict with SIDBI as the latter is its promoter and at the same time secures its guarantee for the enterprises financed directly by it. CGTMSE premia rates were found to be high by their primary lending institutions and the claim settlement process unacceptably late.
* Role of credit rating agencies and effectiveness of internal credit rating tools.
* Recommendations to the Centre on policy initiatives.
* Digitisation of MSME lending and managing its transition.
* Setting up of Movable Asset Registry — Operational issues and directions.
* Setting up of Public Credit Registry — Roadmap for data integration without sacrificing data
privacy and data security.
Given the cascading effect of the large corporate manufacturing and services enterprises on the MSMEs, their healthy growth is crucial for employment and growth of the manufacturing sector as a whole.
Since MSMEs are still largely debt driven and not equity driven, it is important that access to credit should be easier, cleaner, and faster.
The writer is Adviser, Government of Telangana on Micro and Small Enterprises
Published on December 27, 2018, The Hindu Business Line


Thursday, October 5, 2017

India's Growth Story


The Apparent and the Real Growth Story of India
B.  Yerram Raju*
There was a chorus from some economists with former FMs joining against the transitory decline in the GDP growth as though GDP is a strong determinant of growth. High growth and high inflation are good friends (see the table below) and the net result has resulted in poor becoming poorer and rich, the richer.
S.No.
Particulars
Average
2009-10 to
 2013-14
2014-15
2015-16
2016-17
2017-18
First
quarter
1
Real GDP@ market prices (%change)
7.4
7.5
8.0
7.1
5.7
2
Inflation (CPI-Industrial workers) (average %change)
Wholesale price Index (average % change
10.3

7.1
6.3

1.3
5.6

-3.7
4.1

1.7
1.8

1.9
Source: RBI Annual Report 2016-17 and monthly Report September 2017.

Notwithstanding some of the good things that NDA government has done like the laws to regulate the Real Estate sector and the Insolvency & Bankruptcy Code, amending 87 rules for FDI in 21 sectors, abating corruption in some quarters and the GST introduction etc., resounding alarm has been the faulty(ed) demonetization, the GST glitches and the enigmatic oil prices that have lost the relationship with the crude price variations.

In the context of monetary policy announcement there is another chorus for reduction in interest rates as though such reduction in the backdrop of risk aversion of the banks due to the unrelenting NPAs would kick start fresh demand for credit. All the rate cuts thus far failed to result in any fresh credit or a pass through to the existing clients to spur demand. It is doubtful that RBI would have the luxury of another rate cut in the emerging economic uncertainties and falling rupee on the Forex front. Stock markets became nervous with the global undercurrents of rising unrest between North Korea and USA.

While demonetisation set in a trail that closed the a lakh and odd shell companies and disqualified 3lakh directors apart from around Rs.30000cr tax evasion, GST is in the process of bringing in better tax compliance. Going by global experience, GST will take a minimum of two years to stabilise. However, what the GST missed out is a big worry: skipping the petrol, diesel and trade in waste and scrap. A rough estimate says that the city of Mumbai alone has a turnover of Rs.1trn a year in waste and scrap. Huge black money hides here because all deals are in cash even now.

Rising fiscal deficit is another major concern. The States in the emerging political context and certain states by habit have been indulging in distributive justice without productive gains. Gujarat elections are a case in instance where the insurance companies against no fall in agriculture production are in line for responding to unsustainable claim settlements under PMBY.

In addition dragging farm sector despite good monsoon, education and health sectors are the other bigger causes for the present imbroglio in the economy.

Pragmatic government would have started addressing more worrisome issues like the rising unemployment and declining manufacturing, certainly not as a consequence of the reforms but as a cause.

Nation with more young population in the backdrop of consistent unemployment rate of 7-8% during the last three years is also facing the rising aged working population with bulging demand for high pension budget. NSSO 2011-12 Employment Survey – the one quoted by NITI Aayog in its Vision 2017-20 – admits to 51% of the workforce employed in manufacture and services, contributing to 83% share in the economy.

The Vision Document failed to make MSMEs the centre of manufacturing and employment growth.  MUDRA should move to targeting micro manufacturing enterprises in the ‘Tarun’ window. A crore of Rupees investment in manufacturing MSEs would give rise to average of six persons while six crore rupees in medium and six hundred crores in large enterprises would give rise to employing no more than ten and a couple of hundreds respectively. Its emphasis on the high-productivity high-wage jobs in the large industry sector is misplaced while its focus on infrastructure investment is laudable.

Before any strategic corrective interventions are made, the government must listen to dissenting voices both from within and outside. While fresh investments in infrastructure like Rail, Road and Ports are welcome, corrections to the failed infrastructure would require less investments if the Industrial Estates of the yester-era do not turn into havens of real estate instead of manufacturing hubs.

If the next budget typically focuses on elections and fails to provide the much needed investments in education, safe drinking water, health and bolstering manufacturing sector realising that the Make-in-India and Start-Up India remained as slogans both the economy and the NDA are going to witness a decent burial. If every citizen in the country can get safe drinking water health budget of the poor would come down by 70-80 percent. This should be the next mission of the Government.
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