MUDRA NPA Issues

The Pradhan Mantri Mudra Yojana (PMMY) launched in 2015 with the aim to ease credit flow to non-corporate, non-farm small/ micro enterprises by providing small sized loans (unto 10 lac) at various stages of business. It works by directly providing loans through MUDRA bank and by providing refinance to member lending institutions (banks & NBFCs).

8.6 lac crore was disbursed as of FY19, out of which 45% of loans were of less than Rs. 50000 ticket size. Despite of significant growth in MUDRA loans, there have been concerns regarding the loans which have been highlighted by banks and RBI.

Lack of due diligence : A key concern is possibility of adoption of lower credit standards or lack of due diligence on the part of PSBs to meet MUDRA targets. This can significantly impact credit quality.

Loans provided : The average loan disbursed in 2018 was of Rs 45000, with Shishu accounts comprising 86% of the total, which is not enough capital to start business. Thus these loans may be used for personal requirement or immediate funding, putting them at a risk of higher default.

Inadequate Refinancing: MUDRA was converted into a bank with a corpus of Rs.20000 crore to provide refinaIcnign. However, there has been inadequate capital to refinance loans which are now outstanding at Rs. 7.4 lac crore. It also has a caveat to banks ability to refinance as it requires banks to lend at the base rate / MCLR to avail such benefits.

Lack of collateral: No collateral in MUDRA loans creates significant risk for lending institutions due to lack of buffer against potential defaults.

Credit guarantee fund: The fund with a corpus of Rs. 3000 crore may not provide sufficient coverage.

The MUDRA NPAs stood at 2.86% of loans disbursed which is up from 2.52% in FY18.