The level of bad loans under PM Mudra Yojana have been increasing, analyse the steps which need to be taken to fix the Mudra Scheme.

The total NPA in the MUDRA scheme have jumped to 2.68 percent in FY19 from 2.52 percent in FY18. Since inception, over 19 crore loans have been extended under the scheme, with the aim to lift beneficiaries out of poverty. Though, the concerns of over growing level of NPAs is worrisome. 

The recent alarm has been sounded by Dy. Governor MK Jain, who advised banks to focus on  the repayment capacity at the appraisal stage itself and monitor loans through the life cycle of the account. Systemic risk may arise from unsustainable credit growth, increased interconnectedness and financial risks manifested by lower profitability

Fixing the Mudra scheme – 

A forced approach to loans :  Targets were given to banks to dole out Mudra loans. It also included geographical targets to do loans in backward states. The banks should have been provided an enabling environment to provide loans rather than forcing predetermined targets. 

Lack of best practices : Best practices in loan origination have been neglected while authorising and disbursing loans. The aim was to meet a certain specific target rather than identifying worthy borrowers. There is a need for capacity building to manage such ticket size loans. 

Banks not the right vehicle to deliver Mudra loans : The small ticket size loans of less than Rs 10 lakh requires different expertise in terms of management. The micro finance institutions (MFIs) are best suited to do micro loans. Similarly, RBI’s new institutional infrastructure in the form of Small Finance Banks (SFBs) also specialize in small ticket size loans and can handle small borrowers. The cooperative banks are also amongst the options to operate in the small loan segment.

Lack of refinancing : The loans under Mudra scheme were originally designed as a refinancing product backed by Mudra agency to refinance the banks and NBFCs. However, the refinancing budgets was not adequate to cover the loan size of Rs 7 lakh crore. Due to budget constraints banks were asked to provide Mudra loans at affordable rates. There is a need to support banks with a refinancing line via the agency. 

Application of Fin-tech

New technologies play a key role in devising efficient ways to do credit assessment of people who don’t have a credit history. An assessment of tools like driving license, social media, tax returns, GST returns can be used to find out the cash flows who don’t have enough credit history. Tools such as these should be used by the government and PSBs which loan under Mudra to assess the credit worthiness of such borrowers.