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Mudra Loan Sanctions Slide Amid Asset Quality Concerns 

Loan sanctions under the Narendra Modi government’s flagship ‘Mudra’ scheme are running at a pace well below last year.

Customers fill in forms as other customers wait in line at a bank in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Customers fill in forms as other customers wait in line at a bank in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Loan sanctions under the Narendra Modi government’s flagship ‘Mudra’ scheme are running at a pace well below last year as lenders keep a wary eye out for an increase in defaults.

According to data available on the Mudra website, loans worth Rs 1.52 lakh crore have been sanctioned under the scheme, while Rs 1.46 lakh crore have been disbursed so far this financial year, as of Nov. 29. This is less than half the Rs 3.12 lakh crore sanctioned in 2018-19. With less than four months to go before the financial year ends, the gap is unlikely to be bridged.

Under the Mudra scheme, banks and non-bank lenders can offer small-ticket business loans and refinance them at lower rates. The scheme is divided into three categories: loans up to Rs 50,000 are categorised as Shishu; loans between Rs 50,000 to Rs 5 lakh as Kishor; and those between Rs 5 lakh to Rs 10 lakh as Tarun.

With the Mudra scheme now in its fourth year of implementation, bankers are getting a clearer picture of the repayment track-record of borrowers of these low ticket-size loans. This is impacting fresh sanctions.

Three bankers, who spoke to BloombergQuint on condition of anonymity, said that public sector banks have been going slow on extending further loans under Mudra due to the elevated levels of stress in that portfolio.

While gross non performing assets have been in the range of 5-5.5 percent of total loans, accounts which are stressed but not yet classified as non-performing are at around 15-16 percent of the outstanding loans, said one of the three bankers quoted earlier, who heads a large public sector bank. In the current financial year, the gross NPA ratio could rise to over 6.5 percent, this banker said, adding that much of the stress is coming from the smallest ‘shishu loans category.

For the year ended March 31, 2019, out of the Rs 3.12 lakh crore worth outstanding Mudra loans, Rs 1.39 lakh crore came from the under Rs 50,000 category.

The Mudra annual report for 2017-18 had shown a gross NPA ratio of 5.38 percent across the scheme. The annual report for 2018-19 is yet to be released.

Alok Gupta, chief executive officer, Mudra declined to comment. Gupta and chief financial officer Rajni Sood did not respond to emails sent on Saturday.

Concerns over asset quality of Mudra loans led MK Jain, deputy governor, Reserve Bank of India to raise a red-flag at a recent event. “While such a massive push would have lifted many beneficiaries out of poverty, there has been some concern at the growing level of non-performing assets among these borrowers. Banks need to focus on repayment capacity at the appraisal stage and monitor the loans through their life cycle much more closely,” Jain said.

According to the first banker quoted earlier, since Mudra loans are essentially small-ticket unsecured loans, it is difficult for banks to track the usage of these loans, especially in the smallest loan category. Some of these small loans are being used for consumption rather than business development, the banker added.

The second banker quoted above, who also works with a public sector bank, said that lenders have also slowed down sanctions of Mudra loans as the government has not set any targets this year. While delivering her maiden union budget speech as Finance Minister, Nirmala Sitharaman did not give a lending target for Mudra loans in FY20.

Given the increasing concern over defaults, public sector banks have also introduced more stringent verification norms to ensure that funds are not misused, the bankers quoted above said. This includes verifying records of purchase of equipment by small business owners, visits to their manufacturing facilities and closer monitoring of their annual business revenue.

This, too, could have led to a slowdown in disbursals, the first banker added.

Slower lending by non-bank lenders and private banks may have also played a role in lower sanctions in the current year.

In the past two years, private banks and non-bank lenders have stepped up their participation in the Mudra loan programme. In 2018-19, private banks extended Mudra loans worth Rs 63,624 crore, a 29 percent increase over the previous year. Lenders such as Bandhan Bank Ltd., IndusInd Bank Ltd, HDFC Bank Ltd. and ICICI Bank Ltd. were the largest contributors.

Non-bank lenders, such as microfinance companies and non-banking finance companies, saw a 32 percent increase in Mudra loan disbursements in FY19 compared to a year ago.

This year, however, non-bank lenders are facing a credit squeeze, which has impacted their ability to lend. Private banks, meanwhile, have turned cautious on small business loans due to the weakness in the economy.

According to Kajal Gandhi, vice president at ICICI Securities Ltd., while there is stress building up in the unsecured business loans segment, some regulatory relief has been provided.

“Firstly these borrowers have received a dispensation from the RBI, which is applicable till March 2020. Moreover, there is a discussion to raise the Mudra loan limit to Rs 20 lakh. These things should help the borrowers,” said Gandhi.

The RBI, on Jan. 1, had announced a one-time dispensation for MSME loans up to Rs 25 crore, allowing banks to restructure the loan accounts without attracting an NPA tag till March 2020. Subsequently, an expert panel on MSME lending had suggested that the Mudra lending limit be hiked to Rs 20 lakh, with safeguards.