The next crisis?

The Pradhan Mantri Mudra Yojana (PMMY) has been one of the National Democratic Alliance’s flagship economic initiatives. This repackaging of Small Industries Development Bank of India’s (Sidbi’s) refinancing of micro and small-sized loans has been touted as an answer to claims and concerns that job growth has not been sufficient in recent years. The loans were considered attractive as most are collateral-free. It was hoped that the Micro Units Development and Refinance Agency (Mudra) loans were being used for productive purposes, and thus entrepreneurship was spreading. It had also been the case that, as of 2018, the official data said that repayment levels of Mudra loans were high. The bad loans were between 5 per cent and 6 per cent as of March 2018, which made a pleasant change from public sector banks’ overall indebtedness. However, some concerns should now be raised.

For one, it has been reported that in March 2019 alone, banks disbursed over Rs 70,000 crore as Mudra loans. That amounts to a quarter of the target for the full year. The timing of this bonanza raises valid concerns, as it comes just weeks before the general elections. The number of Mudra loans sanctioned now stands at over 54 million. This spurt of lending should set off alarm bells. Aside from the propriety of using loans in this manner so close to the general elections, there are also questions to be asked about the quality of lending under these circumstances. Mudra loans are supposed to be easy to qualify for. But when Rs 70,000 crore is lent in a month, it is open to question as to whether banks are asking any relevant questions about the borrowers at all even if they are not supposed to demand collateral. The contingent liabilities being built up by Sidbi for these and related loans will clearly have an impact on the government’s fiscal standing, even if they do not reflect in the fiscal deficit numbers. It is also worrying that private sector banks, which have generally been better at minimising non-performing assets, or NPAs, have not gone all in on Mudra lending the way that public sector banks have. 

The Mudra loans scheme is already showing signs of becoming the next source of major NPAs. The number of NPAs in the scheme reportedly went up by 53 per cent in the past year. According to credit-rating agencies, the ratio of NPAs in the scheme is now being underestimated and may be between 10 and 15 per cent of advances. While the very nature of the business of borrowers under Mudra is susceptible to volatility and annual cycles, the surge in NPAs shows banks are not putting in efforts to monitor them to ensure timely repayment. 

The sharp increase in disbursals in March is also worrying because they bring back memories of election-focused loan melas in the past, which have always been a source of financial instability. While the government might well argue that this robust increase in loans is a sign of economic optimism, it is also clear that building up NPAs in this manner for political reasons cannot be considered a responsible development strategy. The Reserve Bank of India, as the banking regulator, should examine the situation in the PMMY more closely and see if some regulatory intervention is required.

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