Surge in MUDRA Loan

September 9, 2021

440

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

Source: IE