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Will Mudra Loan create problems for Banks?

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mudra yojnaMicro Units Development and Refinance Agency (Mudra) is one of the major schemes of the Modi Government. This plan was inaugurated in April 2015. Under this, a small loan of up to Rs 10 lakhs is given to small businessmen without guarantee. Interest rates in the Mudra loan are lower than other types of loans.

The government wants that more and more people take benefit from the Mudra loan and become self-reliant. Due to the government’s efforts, the Mudra loan is currently being considered as a major source of employment generation. People are being financially self-reliant by benefiting from the Mudra loan. The success of this scheme is inspiring the government to increase the Mudra loan budget annually.

The Mudra loan is the flagship scheme of the Modi government. Perhaps, for this reason, Home Minister Hansraj Ahir had instructed to stop the annual increment of bank officials who did not achieve the target of Mudra loan. It is noteworthy that for the first time a Union Minister talked about penalising bank officials for the implementation of the government scheme.

Under the Prime Minister’s Rojgar Yojna (PMRY) or the Integrated Rural Development Program (IRDP), the empowered government always makes pressure over Banks to achieve the set target in the given timeframe. Generally, the loans given under pressure become Non-Performing Assets (NPA).

Until a few years ago, the loans given under the government schemes when turned NPA, then no substantial action was taken against the bank’s employees because it was believed that such loans had given for political reasons, but now the situation is changing. The bank is taking action against the responsible bank’s employees.

In order to make Mudra scheme successful, the banks are trying hard, which can be verified from achieved goals. For example, in the financial year 2015-16, the banks had set a target of sanctioning Rs.1.22 lakh crores loan, but they sanctioned a loan of more than Rs.1.37 lakh crores. In the financial year 2016-17, the banks had a target of sanction loan of Rs.1.80 lakh crore and they were successful in achieving it. In the financial year 2017-18, the banks had targeted to give loans of Rs 2.44 lakh crores among beneficiaries and they approved loans of more than Rs 2.54 lakh crores.

In March 2019, the banks have distributed loans of Rs 70,000 crore under the Mudra scheme, which is one-fourth of the annual target of the Banks. The question arises here is whether the banks have disbursed such a large amount in a short time under any political pressure. If this is the case then it should be considered a matter of concern. Even if the banks have done this in a hurry to achieve the set target, it will also cause loss to the banks as loan proposals cannot be properly analyzed in a short period of time.

It is also being seen that some loans being distributed under the Mudra scheme by banks were first distributed under the micro, small and medium enterprises (MSME). The numbers of Mudra Loans are increasing due to re-distribution of the old distributed loan under the Mudra scheme. The intention behind doing so by bank personnel is to achieve the set target of the Mudra loan.

However, under the Mudra scheme, loans up to Rs 10 lakh are given without any guarantees. Because of this, most beneficiaries refrain from returning it after taking a loan. It was believed that the use of Mudra loan will be done for increasing business, which will lead to entrepreneurship in the country, and the economic condition of the country will be better, but this is not happening.

In this context, according to official figures of the year 2018, the level of repayment of Mudra loan was very good. It is notable that in the financial year 2017-18, NPAs in the Mudra loan stood at 5.38 percent, which was much lower compared to other loans, but this ratio has seen an increase in the financial year 2019. The NPA increased 53 percent in the third quarter of Financial Year 2019 if we compare it from the same period of previous Financial Year. The NPA amount of Mudra loan has increased to Rs.14,931 crore, which was Rs.9,770 crore in the financial year 2018.

In Shishu, Kishore and Tarun, there has been an increase of 64, 52 and 42 percent of NPAs against the previous financial year. NPAs have increased to 58.33 percent, 70 percent, and 45 percent, respectively, in comparison to the previous financial year. In this way, the pace of making NPAs of Mudra loan has already increased significantly. As on March 31, 2018, the number of NPA accounts was 17.99 lakhs under the Mudra scheme, which increased to 28.83 lakh by December 2018. Not only this, but the distribution percentage of Mudra loans is also decreasing.

It is also a matter of worry that the private sector banks, which have usually managed to reduce the NPA till now, have also proved to be lousy like government banks in case of Mudra loans. For this reason, the Mudra loan is becoming a big source of NPA. According to credit rating agencies, banks are showing fewer NPAs under Mudra scheme. If the figures are published honestly, then NPA can reach 10 to 15 percent level.

Mudra loan is becoming contingency liability for CGTMSME, operated by Ministry of Micro, Small and Medium Enterprises, Government of India and Small Industries Development Bank of India (SIDBI). This means that CGTMSME will pay the defaulted amount in case Mudra loan becomes NPA. At present, having higher NPA of Mudra loan is adversely affecting the economy.

CGTMSME had been set up to free the micro and small enterprises from the bond of collateral security so that the flow of credit could be increased. In the joint study of SIDBI and Credit Information Bureau (India) Limited (CIBIL) in June 2018, it was disclosed that the rate of MSME NPA was stable between March 2017 and March 2018. This can be considered a sign of a menace. The NPA growth in this area can stop the growth wheel of the economy.

It seems that the purpose of the Mudra scheme is gradually defeating. At present, most of the people are not paying repayments by taking a Mudra loan. To get the benefits of CGTMME, the beneficiaries are avoiding to pay interest and instalments of Mudra loans. Normally, most of the beneficiaries are fulfilling the conditions of schemes for getting advantage of the CGTMSME facility.

However, it’s not too late now. If the Mudra lenders are properly investigated and the political pressure is not made unnecessarily on the banks to give a loan, then there can be a positive change in the situation, but at the moment, the situation seems to be slipping through hands like sand. Bank, government and other stakeholders must take positive steps in the matter, otherwise, the Mudra loan scheme will fail to achieve its objective like other government schemes.

By Satish Singh

(Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of AFTERNOON VOICE and AFTERNOON VOICE does not assume any responsibility or liability for the same.)

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