The Mudra loan chickens are finally coming home to roost for the Indian banking industry after almost five years of its launch. The worst affected lot are the usual public sector banks (PSBs) who have had a reputation of crawling when asked to bend. The PSBs have conveniently met government-set targets including geographical ones in backward states.
The result? Banking sector is staring at outstanding loans worth over Rs 8 lakh crore and the number of loan defaults is rising. Take, for instance, the Delhi-based Punjab National Bank (PNB) which has seen Mudra loan NPAs at over 20 per cent. Over the last four years, the state-owned bank has sanctioned loans worth over Rs 20,000 crore. The current outstanding loans stand at Rs 10,702 crore as of September 2019. The gross NPAs during the period are at staggering 23 per cent. Sources reveal that the Mudra loan NPA situation is alarming at many other PSBs. In fact, two years ago, the NPA level of Mudra loans at PSBs was around 5 per cent, which jumped to 10 per cent by 2018-19.
High level of slippages is making the Reserve Bank of India (RBI) jittery. RBI Governor Shaktikanta Das had earlier advised banks to be cautious and prudent in lending to small borrowers. The central bank's deputy governor M K Jain on Tuesday red-flagged the growing stress in the Mudra loans. "The lenders need to monitor Mudra loans more closely," he said while speaking at the SIDBI conference.
"There is need to focus on repayment capacity at the appraisal stage and monitor the loans through the life cycle much more closely," he advised.
The Mudra scheme was started by the BJP-led NDA government to support small entrepreneurs with loans up to Rs 10 lakh. The borrowers were mainly shop-owners of mobile repair shops or beauty parlours, etc. The government has often tom-tommed in the past that Mudra scheme has created employment in the country.
The entire Mudra loan scheme had many flaws. First, the scheme was kind of a diktat by the government as it gave targets to PSBs. Later, geographical targets started coming in. The PSBs had their own issues of poor credit appraisal and governance issues, which resulted in loans going to undeserving people. There was also no refinancing support from the government. Even the credit guarantee offered by the Mudra agency was insufficient to cover the loans that crossed Rs 8 lakh crore.
Experts suggest that PSBs are not the right vehicle to do Mudra loans. There are banks such as Bandhan Bank and Small Finance Banks that have made a profitable business model in serving the underbanked and underserved.
Former RBI Governor Raghuram Rajan was the first person to warn about the emerging NPA crisis in Mudra loans. He cautioned that the next crisis in India's banking sector could come from loans extended under Mudra and Kisan Credit Card.
Experts suggest the government should immediately overhaul the scheme before it becomes too big to control and create a systemic crisis.