Collateral Free Credit

Chhattisgarh-based Sri Sibarami, who runs a tea stall, took a Rs 50,000 loan under the Mudra scheme from Allahabad Bank five years ago. Sibarami used the money to upgrade his stall and start selling some snacks. The bank says Sibarami is a success story under the scheme, though he hasn't created any additional jobs. Similarly, Mumbai-based Kiran Rathod, working in an electric fitting shop, approached Union Bank of India for a three-wheeler loan. He is now driving auto-rickshaw as well as working at the shop. The bank says Rathod is an example of the success of the Mudra scheme.

Almost half the Mudra loans have gone to first-time borrowers such as Sibarami and Rathod where the risk is high. Such loans, of less than Rs 50,000, are classified under the Shishu category. Public sector banks, or PSBs, admit they got carried away by the initial frenzy because of push from the government. "We are more cautious now," admits a public sector banker.

Loans under the other two categories - Kishore (Rs 50,000 to Rs 5 lakh) and Tarun (Rs 5 lakh to Rs 10 lakh) - have gone mostly to existing small businesses. There are no documented stories to prove that Mudra loans have created huge wealth, disrupted businesses, created employment in hundreds or scaled up businesses multiple times. On the flip side, the danger is that the Rs 8 lakh crore outstanding Mudra loan amount in books of banks, NBFCs and MFIs is set to grow bigger and bigger, adding massively to the risk in the banking system. Former RBI Governor Raghuram Rajan is on record saying the next crisis in India's banking sector could come from loans to the unorganised micro and small businesses (Mudra) and credit extended through Kisan Credit Cards.

Some bankers suggest there is only a change in the classification of micro loans. Banks are cleverly putting loans they were anyways giving under priority sector advances in the Mudra basket. RBI sectoral data also proves that the Mudra loans are mostly being given under the priority sector lending category. Banks have to disburse 40 per cent net credit in priority areas, which include agriculture & agriculture related advances and micro loans. As per the RBI data, the outstanding loan amount under micro and small segments in the general advances category has remained at Rs 3.75-3.80 lakh crore in the last five years whereas small and micro loans under priority sector advances have jumped from Rs 8 lakh crore to Rs 10 lakh crore. "The focus is more on micro or non-farm loans within priority for Mudra loans," admits Shailendra G. Nadkarni, Executive Director at IDBI Bank.

The Way Forward

Buoyed by the success of Mudra, an RBI-appointed panel has proposed to double the collateral-free loan limit from Rs 10 lakh to Rs 20 lakh. The bankers, especially PSBs, say this will mean that the entire burden falls on them.

There is already the problem of inadequate refinancing support from the government. Also, geographical targets are restricting options for bankers. The head of an SME exchange recently told BT that banks are ignoring SMEs and focusing more on micro loans where it is difficult to generate jobs. "Nobody wants to sign big cheques for SMEs. There is not much recovery in the overall investment demand," says a banker.

The biggest risk in a large micro loan portfolio is default. The NPAs have already started coming in with maximum hit under the Shishu category of first-time borrowers. Out of the total Mudra loan outstanding of over Rs 8 lakh crore, the NPAs are close to 2 per cent or Rs 16,000-17,000 crore. Imagine the risk to banks if the government doubles the limit to Rs 20 lakh. The reasons cited by banks for the high NPAs are poor entrepreneurship skills, higher dependence on family, banks' poor credit appraisal systems and frauds and willful defaults.

Expert say the real extent of the NPAs will be known once they complete the first five-year cycle. Mudra loans tenure is three-five years with interest rates of 10 per cent-plus. Rajnish Kumar, Chairman, State Bank of India, recently told BT that the level of delinquencies is not very high. "But what we have to do is to improve the model," he said.

But should full-scale banks be funding Mudra loans where they don't have much expertise or technology to reduce operational costs? After all, there are specialised banks such as Bandhan Bank, Small Finance Banks and MFIs that have a successful model of lending to micro entrepreneurs. The government and the regulators should encourage these new models. The nodal agency, Mudra, should use technology to study the reasons for the NPAs and sectors or businesses to avoid. The RBI committee on micro loans has also talked about skills such as underwriting and risk management for micro loans.

Clearly, there are many loose ends that need to be tied up before any expansion of Mudra loans.

@anandadhikari