Mudra Loans, Way Forward – a Road map

Pradhan Mantri Mudra Bank Loan Yojana (PMMY) scheme was launched on 8th April’15. This is a scheme to provide loans to small businesses and micro institutions through banks, RRBs, scheduled urban and state co-operative banks, MFIs and NBFCs which in turn would be refinanced by MUDRA (Micro Units Development and Refinance Agency or the MUDRA Bank) Corporation.

The following are the three categories in MUDRA loans that are provided in stages over a period of time to the unemployed people in order to enable them to transit from being self employed to small entrepreneurs. 

Shishu: loan up to Rs. 50,000 to small businesses.

Kishor: loans of an amount ranging from Rs. 50,000 up to Rs. 5 lakh.

Tarun: loans of amounts ranging from Rs. 5 lakh to Rs. 10 lakh.

The broad objectives of MUDRA loans are to create easy access to finance for the unbanked at lower interest cost and give SC/ST preference in lending.

Eligibility

  • Proprietary and partnership firms.
  • Small business and manufacturing units like food services, vegetables, fruit vendors, hair cutting saloon, beauty parlours, transportation services, repair shops, SHGs (Self Help Groups) hawkers, artisans, various other professionals and service providers. 
  • No necessary collateral or loan application fee is required to place an application for loan.
  • MUDRA loans are given only for manufacturing, trading and service related activities to those who belong to non corporate and non farming sectors.

Current Status

Right from the inception of the MUDRA corporation, Rs.5.59 lakh Crores loans are given so far to 15.73 Lakh No. of borrowers. 

NPAs

  • As on 31 st March, 2018 – NPAs- Rs. 7277/31 Crs.
  • As on 31 st March, 2019 – NPAs- Rs. 16,481/45 Crs.

No. of NPA accounts

  • 31st March, 2018- 17.99 lakh
  • 31st March, 2019- 30.57 lakh

Mudra Loans can be covered under insurance through CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) run by SIDBI. The CGTMSE ceiling is Rs.200 lakhs for Mudra loans given by SCBs (Scheduled Commercial Banks) and Rs. 50 lakhs for Mudra loans given by RRBs and MFIs.

As the beneficiaries of Mudra loans are highly mobile and normally do not have a fixed place of operations, there are difficulties in monitoring and recovery of the loans given to them. This is one main reason for the increasing trend of bad loans in the last two years. Average amount of mudra loans given translates to Rs. 46,000 per borrower whereas more than Rs. 5 lakh loan given per borrower is just 1.3% of the total mudra loans. 

Loans amounting to Rs 3.11 lakh crore in total were issued between April 1, 2018 and March 31, 2019. According to a statement given in the Rajya Sabha on February 12, 2019, about 45% of the total sanctioned Mudra loans have been given to women. 10.15% of the Mudra loans have given to SCs and 3.3% to STs respectively. Twenty one public-sector banks have together issued Rs 2.74 lakh crore. Segment wise bad loans are as follows –

  • Shishu- 58.33%
  • Kishore- 70%
  • Tarun- 45%

There is a need to address the problem of increasing NPAs in Mudra loans though the NPAs are less than 3% of the loans since the number of such NPA accounts consists of 30.57 lakh accounts. In the long run, the increasing NPAs in Mudra loans will add to the woes of the PSBs who are already saddled with massive bad loans of Rs. 8.64 lakh crores as on 31st December, 2018. Therefore, there is a need to review the existing mechanism and bring certain structural changes to address this problem.

Following measures are suggested in this regard –

  • Totally exclude the SCBs from the mudra loans mechanism. The existing Mudra loans of SCBs may be transferred to other direct lending institutions of Mudra loans. 
  • RRBs, scheduled urban and state co-operative banks, MFIs, NBFCs and payment banks to take the total responsibility of financing the beneficiaries under Mudra loans. 
  • The above Mudra loans to be totally refinanced by Mudra Corporation.
  • All Mudra loans to be fully covered under the CGTMSE for insurance with SIDBI.
  • Introduce measures to enable the Mudra loan funding institutions like- RRBs, scheduled urban and state co-operative banks, MFIs, NBFCs and payment banks to claim and receive the insurance amount under CGTMSE from SIDBI within certain specified time lines so that inordinate delays in settlement of insurance claims can be avoided.
  • Mudra Corporation to be adequately capitalized and permitted to raise funds for refinancing Mudra loans by floating tradable debt instruments which can be subscribed by PSBs and other approved financial institutions that are to be ranked at par with other SLR instruments. 
  • Government to provide interest subsidy to Mudra Corporation when there is negative spread between its cost of funds and the refinance rate on Mudra loans. 
  • Mudra Corporation to maintain the list of defaulters of Mudra loans and share it with CIBIL at periodical intervals on ongoing basis. 
  • To insist the beneficiary of Mudra loans to maintain their bank accounts only with the bank through whom they have availed such mudra loans in order to avoid multiple bank accounts and prevent availing mudra loans from more than one bank. This can be effectively monitored once the mudra loans database is shared and updated at periodical intervals with CIBIL. 
  • Bad loans under Mudra loans to be classified as NPAs when the overdues cross the threshold limit of 120 days (currently the threshold limit is 90 days for SCBs and 120 days for other lending institutions like- RRBs, scheduled urban and state co-operative banks, MFIs, NBFCs). 
  • Linking of all Mudra loans with Aadhar cards of the beneficiaries for tracking the whereabouts of the beneficiaries since they are by and large highly mobile. 
  • Developing active reinsurance market for transfer of the risk of Mudra Corporation under insurance portfolio consisting of Mudra loans.
  • The measures suggested above if implemented would not only lead to expansion of the Mudra loans but also result in effective monitoring and control of NPAs in this Mudra loan portfolio.

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About the Author

B.N.V. Parthasarathi
Ex Senior Banker, Management and Financial Consultant, Visiting faculty at premier B Schools and Universities. E mail- [email protected]