Mudra loans: NPAs may have doubled in a year, but it is not a reason to worry yet

Over the last few years, bad loans or non-performing assets have plagued Indian banks in general and public sector banks in particular. Bad loans are loans that haven’t been repaid over a period of 90 days or more. The bad loans of public sector banks peaked at Rs 8,95,601 crore as of 31 March, 2018. They declined a little to Rs 8,68,812 crore by 30 September, 2018. A bulk of these bad loans have been because of lending to corporates. Just 95 borrowers had total bad loans amounting to Rs 5,57,110 crore. In this scenario, there has been a lot of talk about the mounting bad loans under the Pradhan Mantri Mudra Yojana (PMMY). The problem is that very little data has been offered in support. Mudra loans are basically a classification. Loans of up to Rs 10 lakh, given by banks (both public sector and private), small finance banks, regional rural banks, cooperative banks, microfinance institutions and non-banking finance companies (NBFCs) to non-corporate, non-farm, small and medium enterprises, are categorised as Mudra loans. There are three categorisations under the overall categorisation. They are Shishu (up to Rs 50,000), Kishore (above Rs 50,000 and up to Rs 5 lakh) and Tarun (Above Rs 5 lakh and upto Rs 10 lakh). [caption id=“attachment_2188703” align=“alignleft” width=“380”]  PIB image[/caption] In a recent answer to a question raised in the Lok Sabha, the Ministry of Finance provided some data regarding the bad loans as a proportion of loans categorised as Mudra loans for public sector banks. Let’s take a look point-wise. 1) The Mudra bad loans of public sector banks as of 31 March 2018, stood at Rs 7,277.31 crore. They stood at Rs 596.72 crore and Rs 3,790.35 crore as on 31 March 2016 and 31 March 2017, respectively. 2) Of course, in absolute terms the Mudra bad loans of public sector banks have gone up. But that isn’t the right way of looking at things, simply because the total amount of Mudra loans has also gone up over the years. The government reply in the Lok Sabha tells us that as on 31 March 2018, the total bad loans stood at 3.43 percent of the total loans categorised as Mudra loans for public sector banks. This is very low in comparison to the overall bad loans of public sector banks. As of 31 March 2018, the overall bad loans of public sector banks stood at 15.6 percent. When it comes to lending to industry, 24.6 percent of the loans made by public sector banks, have gone bad. 3) Just comparing Mudra bad loans of public sector banks with overall bad loans is not enough. The trouble is that the Ministry of Finance hasn’t provided the figures of bad loans as a proportion of total loans categorised as Mudra loans for public sector banks, for 2015-2016 as well as 2016-2017. Nevertheless, we can overcome this obstacle by using some data which is available in the annual report of Mudra for 2017-2018. The bad loans as a proportion of total loans categorised as Mudra loans for public sector banks, as of 31 March 2016 and 31 March 2017, stood at 1.25 percent and 3.17 percent, respectively. The same bad loans rate as of 31 March 2018, was at 3.43 percent. This is a clear indication of the fact that as the total amount of loans disbursed and categorised as Mudra loans has gone up, the proportion of loans being defaulted on has also gone up. And this isn’t a good sign. 4) In fact, the annual report of Mudra provides another interesting figure. It puts bad loans as a proportion of total loans in the entire financial system categorised as Mudra loans, at 5.38 percent. Remember, up until now we had been talking about the Mudra bad loans of public sector banks. But loans made by other financial institutions are also categorised as Mudra loans. These institutions include private banks, regional rural banks, cooperative banks, microfinance institutions and NBFCs.

Looking at data for 2015-2016, 2016-2017 and 2017-2018 tells us that loans made by public sector banks form around 36-43 percent of the loans categorised as Mudra loans on the whole. This basically means that a greater proportion of the loans being categorised as Mudra loans are being made by financial institutions other than public sector banks. The Mudra bad loans rate for public sector banks stands at 3.43 percent. The overall Mudra bad loans rate stands at 5.38 percent.

What this tells us very clearly is that the Mudra bad loans rate of financial institutions other than public sector banks, is higher. This figure isn’t available publicly but can be estimated by making an assumption. Let’s assume that loans given by public sector banks form 40 percent of the total loans categorised as Mudra loans. Using this assumption, we can conclude that the Mudra bad loans rate for financial institutions other than public sector banks stands at 6.68 percent. This is clearly on the high side and a reason to worry about. To conclude, it would help if both the Mudra agency and the Ministry of Finance put out regular and detailed data regarding Mudra bad loans. With an overall target of Rs 3,00,000 crore in 2018-2019, the loans categorised as Mudra loans are no longer small change. They are a large part of the financial institutions operating in India and hence, detailed data needs to be made available. (The writer is the author of the Easy Money trilogy).