When it comes to bad loans, it is not just large corporates that banks are worried about. Banking industry estimates suggest a steady rise in bad loans from lending to MSMEs (micro, small and medium enterprises), now re-classified as Mudra loans.

The Pradhan Mantri Mudra Yojana (PPMY) launched in April 2015 sought to provide support to small and medium businesses by providing collateral-free loans of up to ₹10 lakh.

Banks and microfinance institutions, which were giving out loans in the stipulated ticket-sizes, reclassified these as Mudra loans. Lending is done under three schemes — Shishu (loans up to ₹50,000), Kishor (₹50,000 – ₹5 lakh) and Tarun (₹5-10 lakh).

According to industry estimates, gross non-performing assets arising out of Mudra loans vary between 10 and 15 per cent, especially in some pockets. The exact quantum of bad loans under this loan is yet to be specified. “The NPAs on these loans are rising, in line with the general trend in the economy. But it is not at dangerous levels,” Ravi Kishan Takkar, MD and CEO, UCO Bank, told BusinessLine .

The repayment record of a majority of small enterprises has been hit, with most of them suffering a cash crunch post demonetisation. The rollout of GST, has further added to their woes by making working capital requirements go up.

“The industry is still struggling with the legacy of demonetisation. The repayment cycle has been affected with borrowers who defaulted on one or two payouts finding it difficult to fall in line,” Manoj Kumar Nambiar, Managing Director, Arohan Financial Services, said.

Pricing mechanism

But industry is worried about such large scale rise in NPAs from Mudra loans.

According to Ashvin Parekh, Managing Director, Ashvin Parekh Advisory Services, the rise in NPAs in such small ticket loans is a cause of concern. The bad loans could also be specific to certain geographies.

“Under such schemes, banks fund local economic activities of different communities. If there is any disruption in those communities in a particular geography, then NPAs may move up,” Parekh said.

In terms of risk factors, such small loans are generally diversified. The associated risks are considered to be lower and hence not priced into the product. “But, if such loans go bad then it could pose a greater risk,” he said.

So far during FY18, as many as 1.9 crore proposals amounting to over ₹91,124 crore have been sanctioned of which nearly ₹87,396 crore has been disbursed.

Disbursements target

The Budget set a disbursement target of ₹2.44 lakh crore for Mudra loans in FY18, almost 40 per cent higher than the ₹1.75 lakh crore disbursed in FY17.

However, the higher disbursement target set by the government may lead to some problems.

As market sources maintain, it might force banks to step up lending to the segment; and this in-turn may push up the quantum of bad loans.

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