The four year old MUDRA loan scheme is now hogging the headlines for all the wrong reasons. A disbursement of 12.27 crore loans worth over Rs 7 lakh crore is what the government keeps claiming as a success, but the deteriorating asset quality has been bothering the market.
These forced loans on banks not only put a burden on the lenders, but also indirectly impact the government exchequer as the public sector banks will have to be recapitalised with the tax payer's money at some later date. So what are the inherent flaws in the Mudra loan scheme?
A Forced Approach
There is a forced approach in dolling out Mudra loans. The targets have been given to every bank. In fact, there are also geographical targets to do loans in backward states. The banks should be given an enabling environment to participate in such loans rather than forcing them year after year with targets.
The small ticket size loans of less than Rs 10 lakh require a very different expertise in terms of managing the loans as well as making it a success. The micro finance institutions (MFIs), though suffered a blow during Andhra crises, are best suited to do micro loans. Similarly, the RBI has created a new institutional infrastructure in the form of Small Finance Banks, which specialise in small ticket size loans. In fact, the entire organisation is groomed to handle and manage small borrowers. The cooperative banks are also best suited to operate in small loan segment.
No refinancing Support
Mudra loans were initially designed as a refinancing product where the government through Mudra agency would refinance the banks and NBFCs. The refinancing budgets are not adequate to cover the loan size of Rs 7 lakh crore. The government has its own budget constraints and the banks have been asked to provide Mudra loans at affordable rates. Any scheme, which is forced by the government on banks, should have a refinancing line.
Inadequate credit guarantee support
The Mudra loans are without any collateral. They are more like personal loans. The credit guarantee is too low to cover large losses. The government has recently cleared a credit guarantee fund of around Rs 100,000 crore, but the question is; where is the money? The current credit guarantee is inefficient.
Technology and Fin-tech
The new technologies and fin-techs are playing a key role in devising alternative ways to do credit assessment of people who don't have a credit history. They use various tools like driving license, social media tools, tax returns, GST returns to find out the cash flows of many of the self employed or people, who don't have enough credit history. These tools should be used by the government and the public sector banks, which are big players in Mudra, to assess the credit worthiness of such borrowers.