Modi govt’s Mudra scheme adds concerns for banks; here’s what RBI points out

Gross NPAs under Mudra rose by 68.7 per cent to Rs 16,480.87 crore for the financial year ended March 2019 from Rs 9,769 crore a year ago.

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Reserve Bank of India Deputy Governor MK Jain on Tuesday warned bankers about the growing stress in Mudra (Micro Units Development and Refinance Agency Ltd) loans and asked them to monitor such loans closely as unsustainable credit growth in the sector can risk the system.

“Mudra loans are a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of non-performing assets among these borrowers,” Jain said at a Sidbi conference on microfinance. Banks need to focus on the repayment capacity at the appraisal stage itself and monitor loans through the life cycle of the account much more closely, Jain said.

Gross NPAs under Mudra rose by 68.7 per cent to Rs 16,480.87 crore for the financial year ended March 2019 from Rs 9,769 crore a year ago.

Pradhan Mantri Mudra Yojana (PMMY) was launched in April 2015 for providing loans up to Rs 10 lakh to small and micro-enterprises. These advances which are given by commercial banks, regional rural banks (RRBs), small finance banks, cooperative banks, microfinance institutions (MFIs) and NBFCs are refinanced by the government. Total disbursements were Rs 311,811 crore as of March 2019.

“Systemic risk may arise from unsustainable credit growth, increased interconnectedness, pro-cyclical and financial risks manifested by lower profitability,” Jain said. It is interesting to see leading e-commerce companies tying up with banks and NBFCs to offer working capital loans to their suppliers, which are mostly micro and small enterprises, at competitive terms, he said.

Stating that GST has hit the informal economy significantly, he said, “as a result of the improved digital footprint, MSMEs have become attractive clients for banks, NBFCs, and MFIs, thereby reducing their dependence on the informal source of funds.” The cost of credit for MSMEs will also come down meaningfully as lending will shift from collateral-based lending to cash flow based lending, he said.

Noting that technology has its own share of risks and challenges for the financial sector regulators and supervisors, he said, “early recognition of these risks and initiating action to mitigate the related regulatory and supervisory challenges is key to harnessing the full potential of these developments”.

The government, in July, informed Parliament that total NPA in the Mudra scheme of over Rs 3.21 lakh has jumped to 2.68 per cent in FY19 from 2.52 per cent in FY18. Since the inception of the scheme, over 19 crore loans have been extended under the scheme up to June 2019, the government had informed. Of the total, 3.63 crore accounts are in default as of March 2019.

The focus of the MFI sector must be on digital finance, Jain said, adding data confidentiality and consumer protection are major areas that also need to be addressed by them. “Keeping in view the need to increase transparency, address customer-centric issues and safeguard the interest of low-income customers, microfinance lenders must put the interest of their clients first and implement the code for responsible lending,” he said.

MFIs must also broaden their client outreach to reduce the concentration risk in their own interest and to serve a wider clientele base. From a financial inclusion perspective MFIs should critically review their operations so other regions don’t remain underserved, he said. —With PTI

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First published on: 27-11-2019 at 11:41 IST