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Adding to the bad-loan book: Does Mudra’s success have a flip side?

business Updated: Jun 06, 2016 06:43 IST

NEW DELHI: It can easily be called a loan mela.

Since the launch of the Pradhan Mantri Mudra Yojana (PMMY) in April 2015, over 30 million borrowers have been given around Rs 1.23 lakh crore worth of loans under the scheme. There are three types of loans under PMMY: Shishu (up to Rs 50,000), Kishore (up to Rs 5 lakh) and Tarun (up to Rs 10 lakh).

But there’s a flip side. According to CH Venkatachalam, general secretary, All India Bank Employees Association (AIBEA), a majority of these loans may go bad and add to the non-performing assets (NPAs) of lenders.

It may not be a tall claim. After all, the AIBEA has members across 27 public sector banks in over 100,000 branches. The scheme has been thrust upon banks, and there has been no proper assessment of credit histories and repayment capacities of borrowers in the rush to disburse the targeted loan amount, says Venkatachalam.

But whether or not the loans turn bad also depends on whether banks are able to recover those loans.

THE MORATORIUM

Mudra loans are given with a moratorium — the period after which a borrower has to start paying installments — of six months.

During April-June 2015 — the first quarter since the launch of the scheme — just over Rs 3,000 crore worth of loans were disbursed. The number jumped to Rs 26,000 crore in the quarter ended September 30, 2015, and to Rs 61,070 crore in the next quarter. The final quarter of 2015-16 saw loan disbursals increase to Rs 1.23 lakh crore. This means half of the loans are still in their moratorium periods. And so, question marks still linger on the exact amount of defaults.

THE OTHER HALF

For loans whose moratorium periods have ended, repayments have been mixed.

Sachin Jain, a resident of Sitamau district in Madhya Pradesh, took a Rs 50,000 loan in September last year and started paying it back in the following month itself.

The instalments are not huge. EMIs can be as low as Rs 1,200 for a Rs 50,000 loan taken over a period of five years, the maximum term of a Mudra loan, at a 13% interest.

But not everyone may be as forthcoming.

An official at a rural branch of one of India’s biggest lenders says banks have started transferring money from borrowers’ fixed deposit (FD) accounts to make up for installments.

Such measures are being adopted by commercial banks, especially those from the public sector, since they are grappling with mounting bad loans. “At present, we are doing this only for Mudra loans,” said the official quoted above.

Public sector banks, which have given out almost Rs 55,000 crore of Mudra loans, are wary as such loans are meant for non-corporate small businesses, and micro, small and medium enterprises. Both sectors, incidentally, have high NPA ratios.

THE MICRO OF MUDRA

Banks account for 70% of the total Mudra loans disbursed. Non-banking micro-finance institutions (MFIs), which have together given out Rs 33,100 crore of loans, account for the rest.

Among the 35 MFIs, SKS Microfinance has alone disbursed Rs 11,642 crore, second only to State Bank of India, the country’s biggest lender.

MFIs usually lend in small-ticket sizes and high interest rates. But NPA ratios are close to zero.

“Contrary to the popular belief we have very low NPAs. This is usually because of our underwriting processes,” says S Dilliraj, president, SKS Microfinance, which gives out loans to groups of women, with one borrower guaranteeing the other’s repayment.

WILL THE LOANS GO BAD?

Jiji Mammen, CEO, Micro Units Development and Refinance Agency (Mudra), had told HT in an interview in April that if the loans are issued prudently and monitored closely, there will not be any rise in NPAs.

This may be the reason why some bank branches are not processing Mudra loans currently, as the target of Rs 1.2 lakh crore was breached in March.

“We had branch-wise targets and once they were reached, we stopped,” said the official quoted earlier.

Mammen disagrees. He says Mudra loans have not stopped flowing, and a new target of Rs 1.8 lakh crore has been decided upon for 2016-17. Bank-wise targets will follow soon.