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