Surge in MUDRA Loan


    In Context

    • Public Sector banks are experiencing a sharp surge in the proportion of Mudra loans turning into non-performing assets (NPAs).
    • The prime reason behind such a trend is the impact of Covid on incomes and repayment capacity of borrowers.

    About Pradhan Mantri Mudra Yojana (PMMY)

    • MUDRA stands for Micro Units Development & Refinance Agency Ltd.
      • It is a financial institution set up by the Government.
    • Under the Pradhan Mantri Mudra Yojana (PMMY), banks provide collateral-free loans up to Rs 10 lakh.
      • These loans are given to non-farm small/micro enterprises for income generating activities.
    • Launched in 2015 
    • Aim: To provide funding support to micro-entrepreneurs, with the government providing annual loan sanction targets to banks.
    • There are three categories
      • Shishu loan up to Rs 50,000 
        • for micro entrepreneurs like vendors and shopkeepers, 
      • Kishor loan of Rs 50,000-Rs 5 lakh 
        • for smaller enterprises like buying for light commercial vehicles, allied agriculture activities and equipments, and 
      • Tarun loan accounts of Rs 5-10 lakh 
        • for, say, food product units.
    • Achievements:
      • Loans to disadvantaged sections of society 
        • Women entrepreneurs, SC/ST/OBC, Minorities etc are key beneficiaries. 
      • Boost to AtmaNirbhar Bharat and Make in India
        • The focus has also been on new entrepreneurs.
      • Employment Generation
        • As per a survey conducted by the Ministry of Labour and Employment, PMMY helped in generating 1.12 crore net additional employment from 2015 to 2018.
        • Out of the 1.12 crore of estimated increase in employment, women accounted for 69 lakh (62%)

    Status of the Problem

    • More than three times increase in MUDRA loan related NPAs in past 1 year:
      • Gross NPAs in the Mudra loan book is estimated to have reached around 20 per cent at June-end 2021 from around 6 per cent at March-end 2020.
      • Out of total Mudra loans of Rs 11,357.14 crore, Rs 1,055.53 crore or 9.29 per cent have turned into NPAs as on June-end 2021.
    • Multiple States Affected:
      • In a key state like Maharashtra, for instance, SBI’s NPA on Mudra loans is at 59 per cent as on June-end 2021.
        • Public sector banks’ Mudra loan NPAs in Maharashtra have jumped to as high as 32 percent at June-end 2021, from 26 percent at June-end 2020.
      • Canara Bank reported an NPA as high as 114.35 per cent in Jharkhand as on June 30, 2021.
      • A similar trend is seen in other states such as Gujarat and Uttar Pradesh.

    • Maximum Stress in SBI
      • After SBI, the highest proportion of NPAs among public sector banks in the state has been recorded by
        • Punjab National Bank at 44 per cent, 
        • Indian Bank at 33 per cent and 
        • Bank of Maharashtra at 31 per cent at June-end 2021.
    • Even Private Banks are affected but to a lesser extent
      • Among private sector lenders, HDFC Bank’s Mudra loan NPA in Jharkhand was at 26.21 per cent, followed by IDFC First Bank at 24.93 per cent. 
      • Of HDFC Bank’s outstanding Mudra loans of Rs 208.69 crore, Rs 54.70 crore (Around 25%) has turned into NPA as on June-end 2021.
    • Rise in Mudra Loan
      • The rise in NPAs comes alongside an increase in disbursement under the scheme- from Rs 3.11 lakh crore in 2018-19 to Rs 3.29 lakh crore in 2019-20.
    • NPA in asset-backed Mudra loans
      • Even in asset-backed Mudra loans, such as those taken for buying income-earning equipment and vehicles, the stress has been rising.
      • In these loans, there is kind of a collateral built in. 
      • These are always best performing in terms of repayment, but now NPAs have built up there too.

    Reason Behind such Trends

    • Pandemic Hard Lockdown:
      • It’s obvious that jobs and incomes of people have been hit at the bottom of the pyramid, which is the target audience of Mudra loans.
      • Now this is showing up in data as repayments get affected and delinquencies rise
    • Not Paying Heed to RBI’s Warnings due to Government’s Pressure:
      • The RBI has been cautioning banks repeatedly on the scheme, asking them to adequately assess borrowers’ repayment capacity.
    • Dilemma in Front of Banks of To give loan or not:
      • The banks are also mandated to lend a certain amount to MSMEs.
      • If they don’t lend they have to be accountable for not sanctioning enough loans whereas if they lend, they are blamed for a casual attitude towards NPA.
    • Out of scope of Credit Guarantee Fund for Micro Units (CGFMU):
      • The Credit Guarantee Fund for Micro Units (CGFMU) set up by the Central Government provides lenders guarantee against loan losses in Mudra loans.
      • But the extent of the spike in NPAs is higher than the cover being provided.
      • In April, 2020, the Government had increased the guarantee to 75 percent of NPAs in Mudra loans, from 50 per cent earlier
        • But the cap on guarantee payout has been kept at 15 percent of total loans.

    Way Ahead

    • Bad Bank or ARC as was proposed in Economic Survey
    • Proper Framework to Access the Borrowers Paying Capacity
    • Loan Moratorium for the Sector can be provided.

    Source: IE