Reports of rising defaults in servicing Mudra loans have naturally got the RBI worried. It should be a cause for worry for the government and banks as well, because unlike corporate defaults, Mudra defaults aren’t conceptually wilful.
Muhammad Yunus of Bangladesh, a Nobel laureate and the found of the Grameen Bank, has gone on record saying with women (perceived universally to be more honest) as the lynchpin and with group guarantee acting as a bulwark against default, bad debts were negligible in microfinancing. If we have bucked this healthy trend, the fault indeed lies with the economic slowdown as well as with the non-adherence to the rigorous microfinance model of lending — instead of customers going to the financier, the financier goes to his customers for the grant of loans and the collection of weekly instalments from the proceeds of sales. The lack of guarantee is more than made up by the group or society.
The ‘business as usual’ approach adopted instead was perhaps behind former RBI governor Raghuram Rajan’s skepticism of the Pradhan Mantri Mudra Yojana, which he expressed almost soon after its launch in April 2015. Under the scheme, banks provide loans up to ₹10 lakh to non-corporate, non-farm small/micro enterprises.
At the Sidbi National Microfinance Congress 2019 on November 26, 2019, RBY Deputy Governor MK Jain said banks need to focus on the repayment capacity of borrowers at the appraisal stage and monitor the loans through their lifecycle much more closely. But then, as pointed out earlier, microfinance is an unconventional form of financing, in which repayment capacity is replaced by repayment intent.
Nevertheless, it seems in India, banks have simply opened another window for Mudra loans, thereby bypassing the hard legwork expected of microfinance companies. In fact, Jain conceded this when he said banks, NBFCS, RRBs and cooperative banks simply latched onto the digital footprints of the SME sector left on the GST portal and jumped on the Mudra bandwagon.
It appears in their keenness to expand their business, they blindly put their faith in the relative honesty of SMEs and in the process did not follow the microfinance model of close monitoring of borrowers, as under the Grameen Bank model. This is not to deny the debilitating effect on small businesses of the general economic slowdown. Small businesses, contributing as much as 29 per cent of the GDP cannot remain immune to the economic slowdown.
Statistics bear out the rising defaults by the Mudra beneficiaries. The government had in July 2019 informed Parliament that total NPAs emanating from the Mudra loans of over ₹3.21 lakh crore jumped to 2.68 per cent in FY19 from 2.52 per cent in FY18. Since inception of the scheme, over 19 crore small loans have been extended under the scheme up to June 2019.
However, according to an RTI reply, the bad loans in the Mudra scheme soared a whopping 126 per cent in FY19 — up by ₹9,204.14 crore to ₹16,481.45 crore in FY19, as against ₹7,277.31 crore in FY18.
The bottomline is that Mudra loans have degenerated into conventional business loans riddled with NPA, thanks to the business as usual approach of the lenders. The economic slowdown has of course exacerbated the problem.
Microfinance is a different ballgame. The RBI must ensure in future that banks, NBFCs and others set up separate subsidiaries for their microfinance business, which involves less time on the desk and more of legwork, which is why conceptually, the interest rate is more here than in conventional financing.
The writer is a Chennai-based chartered accountant