The proposal of the UK Sinha panel of the RBI to provide relief to Micro, Small and Medium Enterprises (MSMEs) by way of a ₹5,000-crore stressed assets fund is not only timely, but also throws up relevant questions on another segment of brewing trouble, Pradhan Mantri Mudra Yojana (PMMY) loans.
There have been increasing concerns about the rapid rise in disbursal of Mudra loans not withstanding the surge in non-peforming assets.
Loan disbursals have been going up rapidly since the launch of the scheme in 2015 to offer three categories of business loans — Shishu (up to ₹50,000), Kishor (₹50,000-5 lakh) and Tarun (₹5-10 lakh) — for entrepreneurs.
According to data available with the Micro Units Development and Refinance Agency (Mudra), the apex body of Mudra loans, lending increased by 41 per cent during 2017-18 at ₹2.46-lakh crore.
Though the growth plummeted in 2018-19 at 11 per cent, actual disbursals did see an increase. Against a target of ₹3-lakh crore, ₹2.73-lakh crore was disbursed as on March 31, 2019.
Bankers, including the Reserve Bank of India (RBI), have been expressing concerns over the quality of assets (repayments), which made banks go slow on these loans during the last financial year compared to previous years.
Excessive focus on the Shishu category — which accounts for bulk of total loans — and lack of a facility to scale up to a higher category of advances, are seen as some of the structural issues to be addressed in the PMMY scheme.
There have been reports of a 50 per cent increase in the non-performing assets of Mudra loans in the first three quarters of last fiscal. In January, the RBI, too, cautioned banks on a spike in bad loans under this segment.
Need for change
There is a need to take a re-look at the scheme and the loans. In a way, Mudra does contribute to MSME loans in principle, as far as the co-origination model is concerned. The Sinha panel suggested that Mudra must focus on catalysing the markets — where it may otherwise be risk averse to participate.
It “must evolve into financial institutions which can provide for the MSME sector, risk management support through participation in a whole suite of structured finance products...” the committee suggested. The tone and tenor of this recommendation may not actually come under the purview of the three category of loans; but it could be deployed for the third category — Kishor.
The panel’s suggestion that an MSME account could be considered for an upgrade to “standard” after six months of satisfactory operations, is very much relevant to Mudra loans. Many of the Tarun and Kishor category borrowers have been requesting for some updgradation mechanism.
The idea that Mudra would require enhancement of in-house (or outsourced) capabilities, including underwriting, risk management, fund-raising and better focus on emerging trends might also augur well for the PMMY loans.
Providing market support for PMMY loans and tight vigil over Shishu loans could also be of some help. An impact assessment will certainly provide future direction for lending.