RBI warning on Mudra loans: NPAs aren’t at alarming levels yet, but banks shouldn’t miss the red flag

The Reserve Bank of India (RBI) has cautioned banks on loose monitoring of Mudra loans’ end-use. In his meeting with heads of public sector banks (PSBs) on Friday, governor Shaktikanta Das cautioned the banks on defaults arising out of such loans largely on account of poor assessment of creditworthiness of the borrower, the B_usiness Standard_ reported. What might have alerted the RBI? There are some unhealthy signals Mudra loans have begun to show. One, the NPAs (non-performing assets) have doubled in a year on such loans. The NPA on Mudra loans by public sector banks, which also include regional rural banks (RRBs), jumped to Rs 17,250.73 crore as on March 2019, the government informed Parliament on Tuesday. In the year to March 2018, this was Rs 7,277.32 crore. [caption id=“attachment_4499583” align=“alignleft” width=“380”] Representational image. Reuters.[/caption] That said, NPAs on Mudra loans aren’t at alarming levels yet. Nearly 2 percent gross NPAs of Mudra loans is still far less than the gross bad loans in the banking system, which is close to 10 percent. But, that doesn’t mean there is no cause for concern here. The scheme, in fact, is bundling together a clutch of old existing loans, which are being repackaged and rebranded under a new name. Agencies like SIDBI and NABARD have been giving such small-ticket loans for long. Now with Prime Minister Narendra Modi brand’s push, those schemes have got a leg up and tiny entrepreneurs certainly stand to benefit from that. According to the Mudra website, loans of up to Rs 10 lakh are given to the non-corporate, non-farm small/micro enterprises by commercial banks, RRBs, small finance banks, cooperative banks, microfinance institutions (MFIs) and non-banking financial companies (NBFCs). These are all branded under the Pradhan Mantri Mudra Yojana (PMMY). The borrower can approach any lending institution and avail products under the ‘Shishu’, ‘Kishore’ and ‘Tarun’ categories. A significant chunk of Mudra loans is given out in the ‘Shishu’ category (loans up to Rs 50,000). Such loans given with loose collateral requirements stood at Rs 1.4 lakh crore at the end of March, 2019 contributing to 45 percent of the total loans disbursed in the year. As against this, Kishore loans (up to Rs 5 lakh) are at Rs 99,868 crore or 32 percent of the total disbursed loans and Tarun loans (above Rs 5 lakhs) at just above Rs 72,000 crore or mere 23 percent of the loans. Now, the problem is this. Logically, a Rs 50,000 loan will be sought by someone at the lowest bracket of the income pyramid and there are high chances of this money being utilised for consumption purposes rather than the state business purpose (mostly buying cattle or to open a small vegetable shop) if the bank doesn’t monitor the end-use well. Typically, when it comes to relatively smaller loan amounts, bankers take a lighter approach as against high-value loans. But in the case of Mudra loans, such an approach could turn out to be a problem as most loans are not backed by collateral and banks are constantly nudged by the government to up targets. If the banks don’t take adequate care, Mudra loan NPAs can become a major source of pain for the banking sector. Already, the banking system is grappling with a range of problematic loans such as Kisan Credit Card loans and large industrial loans apart from the ongoing liquidity shortage. The painful NPA clean-up process is yet to complete. State-run banks, which typically shoulder the burden of government’s social sector programmes, need to be extra cautious to avert yet another round of NPA shocker—this time from Mudra loans.