1. What is Pradhan Mantri MUDRA Yojana and the catch in it: Quick read

What is Pradhan Mantri MUDRA Yojana and the catch in it: Quick read

What in a nutshell, is the idea behind the Pradhan Mantri MUDRA (Micro Units Development and Refinance Agency) Yojana scheme? Idea is to slash loan rate from 30% to around 10% for medium and small entrepreneurs.

By: | Updated: October 3, 2015 1:26 PM

What in a nutshell, is the idea behind the Pradhan Mantri MUDRA Yojana scheme? On the face of it, getting PSU banks to lend to micro and small enterprises is a win-win idea since these firms typically borrow from unofficial sources at rates as high as 30%; once the loan rates fall to around 10%, the logic is, these firms will be much more viable and will easily be able to repay their loans. Since India has around 6 crore such enterprises that employ around 11 crore people, such targeted intervention will go a long way in creating the jobs the economy so desperately needs.

Pradhan Mantri MUDRA (Micro Units Development and Refinance Agency) Yojana, Finance Minister Arun Jaitley has said, will disburse Rs 1.2 lakh crore this year to around 1.25 crore small businessmen — Rs 24,000 crore has been disbursed to 27 lakh small businesses so far.

What is the catch in the Pradhan Mantri Mudra Yojana?

There is a catch, a big one at that in Pradhan Mantri Mudra Yojana scheme: typically, large banks do not really cater to this segment of borrowers, so how are the non-performing assets (NPAs) that will probably get created be funded, and isn’t this better done by micro finance institutions (MFIs) and small banks who, in any case, target precisely this kind of customer and know better which unit to lend to and which not to?

Indeed, since the government claims there are no calls being made by officials any more to bankers on their lending practices — the government even wants to distance itself from appointments of PSU chiefs through the proposed Banking Board — doesn’t this run contrary to the philosophy?

If MUDRA does not address this set of issues, the Rs 1.2 lakh crore of lending becomes just another form of directed lending that has contributed to the NPA mess banks are in right now. The real test of how well MUDRA works will be when MFIs and small banks start availing of it while lending to micro and small enterprises.

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    satnam singh
    Oct 6, 2015 at 8:48 am
    sata
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