By March next year, micro loans doled out by banks and non-bank entities without any collateral - Mudra loans as they are called - would cross the Rs5 lakh crore mark. It's huge, given that the outstanding loans of micro and small medium enterprises (MSME) add up to Rs12 lakh crore. The Mudra loans have an alarmingly high level of exposure to small borrowers including women entrepreneurs, SC/STs, tribals and other minorities. Indeed, the doubling of exposure in the risky micro loans category of less than Rs10 lakh in three years by the end of 2017/18 raises eyebrows.
There is actually negligible 'refinancing' as promised by the newly set up Micro Units Development & Refinance Agency Ltd (Mudra). Out of the Rs2.5 lakh crore loans disbursed so far by banks and non-banks, the refinancing is less than Rs5,500 crore. The huge Mudra targets are being met because of loans handed out by banks.
So, what is driving the otherwise risk averse bankers towards unsecured micro loans? "It's a government diktat. They call it a national mission like the Jan Dhan Yojna," say bankers in private. After the launch of Mudra and Pradhan Mantri Mudra Yojana (PMRY) two years ago, the government has directed banks to lend to micro enterprises or income generating units in manufacturing, processing, trading and services sectors. There are specific targets given to banks. The scheme is also directly monitored by the Ministry of Finance. In fact, there are weekly video conferencing sessions where a Joint Secretary in the Department of Financial Services presides over the progress report meeting with bankers and Mudra officials. "We have no option but to follow suit,"says a public sector banker. In addition, the banks cannot escape by achieving the targets in geographies they are strong. The government is now pushing them to achieve state-wise sub targets within the overall target.
The Mudra scheme - like Jan Dhan - is nudging the banks, especially public sector banks (PSBs), to direct resources to meet government objectives. Last fortnight, State Bank of India (SBI) chief Arundhati Bhattacharya made a reference to the cost burden of Jan Dhan accounts as the reason for introducing penalties for not maintaining minimum balances in savings accounts. "We have 11 crore Jan Dhan accounts. To manage such a large number, we need some charges," said Bhattacharya. No banker has spoken yet about the risks in funding Mudra loans.
The bankers can't even complain about lack of funds as they are flush with liquidity post demonetisation. In addition, credit offtake has plunged to historic low levels of 3 per cent from 15-16 per cent four years ago. But there are some who question the governments assertion of breaking new ground in terms of funding micro units - the official figures claim to have disbursed Rs2.5 lakh crore plus to over three crore units under the Mudra scheme. "Banks had been doing such micro loans earlier," says a consultant. The government has also told banks to bring all loans of up to Rs10 lakh for income generating activity under the Mudra umbrella, irrespective of refinancing. So, it's more of reclassification of these bank loans into three broad Mudra categories - Shishu (upto Rs50, 000), Kishore (Rs50, 000 to Rs5 lakh) and Tarun (Rs5 lakh to Rs10 lakh). Karnam Sekar, Deputy Managing Director at State Bank of India (SBI) says the scale of loans has changed now. "There is focused attention on small loans," he says. SBI and associates have a 12 per cent share in Mudra disbursements.
Bankers defend the scheme by pointing out that there is a guarantee cover for Mudra loans, which is a big comfort. In addition, micro loans without any collateral are also part of priority sector advances. Banks have to lend 40 per cent of their net credit to agriculture, micro and small enterprises and also weaker sections of the society. "Mudra loans are a perfect fit for banks to achieve priority sector targets," says the consultant. Under the priority sector, the sub-target for micro and medium enterprises is 7.5 per cent. Last year, the government has also brought micro enterprises working in agriculture and allied industry under the Mudra scheme. There is an 18 per cent sub-target under the priority sector for agriculture related loans. This step would help banks meet their Mudra targets. "The government is actually using the banks' priority sector norms for meeting its social objectives of funding the unfunded," says a consultant on condition of anonymity.
Scheme On The Ground
The banks availing refinancing (though it's negligible) have to lend at around the marginal cost of lending rate (MCLR). Currently, banks have an MCLR of 8-9 per cent. "There are few loans which are being done at MCLR plus one per cent, but a majority of loans are done at a higher rates because banks are not availing refinancing," says a private banker. In some cases, the interest rates hover between 12-16 per cent. Jiji Mammen, CEO of newly set up Mudra Bank, says that they have asked banks to charge reasonable interest rates and many have agreed to lend at their base rates or MCLR. "The twin issues with regard to micro loans are accessibility and availability of credit. We are addressing accessibility first. We believe that gradually the affordability part will also be taken care of because of market forces," says Mammen. Experts say accessibility, especially for small entrepreneurs in the 'Shishu' category is still an issue. Currently, bulk of bank loans under Mudra are in the higher category, between Rs50,000 to Rs10 lakh. The Shishu category is being served by MFIs which charge much higher rate than the banks.
Experts say Mudra's guarantee cover with a corpus of Rs3,000 crore is also not sufficient to cover the risk of default in micro loans. If one takes into account the default rate of 10-12 per cent, the Mudra loan of Rs2.55 lakh crore would easily have NPAs of Rs25,000 crore. As per the scheme, the first 5 per cent of the loss would be borne by the lending institution. If the loan exceeds that, the balance would be borne equally by Mudra and the lending institution. Many say Mudra would require a much higher corpus than the current Rs3,000 crore, which would be insufficient to cover the loan losses in future. "There are around 42 banks who have registered with us for covering their Mudra loan under the Credit Guarantee scheme. Of which, 7-8 banks have already taken guarantee cover for their portfolio, which works out to around Rs5000 crore," says Mammen.
The current NPAs in Mudra loans are at 2 per cent. "The risk of default for micro loans is high because of the nature of the loan. The capacity of a micro entrepreneur to withstand shock is limited," says Sekar of SBI. Experts say loans usually take 3-5 years to show signs of stress. For instance, the current bad loan problem had its genesis in the boom period of 2005-2008. That was the time when banks, flush with funds, wrote most of these loans. Currently, some banks are generously charging MCLR rates from MSMEs which could expose their balance sheet in future as the low rates won't be able to cover the 10-12 per cent loan losses in the micro loan segment. The Mudra scheme also forces banks to lend to certain class of borrowers like SC/STs, women and tribals with targets. "The bankers first role is to assess the viability of the business or project," says a consultant.
Many question PSBs flawed model of financing micro loans. Unlike MFIs that have a robust model, the full scale banks have failed miserably in financing people as well as enterprises in rural, semi-urban and urban centres. For example, Bandhan Bank, an erstwhile MFI, has been a huge success in offering micro loans.
The last few years have been challenging for MSMEs. According to credit bureau TransUnion CIBIL, the NPA rate for MSMEs have increased over the last few years to reach 8.7 per cent in March 2016. This is expected to rise to 9.8 per cent by March 2017. TransUnion CIBIL has put outstanding loans of Rs55,799 crore at risk of default. This is for loans between Rs10 lakh to Rs10 crore. Mudra loans are less than Rs 10 lakh, which are more prone to default because of smaller ticket size and absence of any collateral. Currently, there is also a geographical concentration of Mudra loans in developed states like Maharashtra and Tamil Nadu. Prakash Sundaram, Chief Strategy and Digital Innovation officer at Fincare Group, whose companyDisha Microfin has also won the small finance banking license, attributes this to the credit culture and credit opportunities. "There have been lot of opportunities in the SME space in these states, which has resulted in their development over the years," says Sundaram.
There are many credit bureaus with whom Mudra can collaborate to mitigate risks in micro loan lending. "We have credit information reports for existing micro customers with less than Rs10 lakh loan exposure. We, however, have no ranking of these customers. But we may look at micro loans in future," says Harshala Chandorkar, Chief Operating Officer at TransUnion CIBIL Ltd.
Mudra Bank is also very keen to have some kind of analytics. "We need to develop some kind of mechanism which can capture data and have some kind of analytics to give feedback about risk perception in this segment. If that happens, it will make lenders job much easier and there will be an expansion of Mudra credit," says Mammen.The MSMEs also have other issues such as inadequate operational skills and lack of risk diversification strategies. They also need to achieve scale and have governance issues. "We are planning a Mudra application for self learning which will be available shortly," says Mammen of Mudra Bank. Many analysts say that the right vehicle for funding the unfunded is small finance banks and not commercial banks. There are already a dozen MFIs turned small finance banks that are making their debut this year. These small banks are mandated to provide 75 per cent of their net credit to priority sectors. They have to provide at least 50 per cent of their loans at the ticket size of less than Rs25 lakh. The new banks would certainly take five to 10 years to scale up their operations. The Mudra juggernaut is already growing bigger rapidly. The demand potential for MSMEs is estimated to be in excess of Rs26 lakh crore.
Mudra loans will put a huge burden on the banking system. It's time to talk about the inherent risks in micro loans.