Banks To Review Mudra Loan Book

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Monday, January 14, 2019 3:30 AM

Bank To Review Mudra Loan Book

Background Context

The Ministry of Finance has demanded banks to check and review the loans approved/disbursed under the Pradhan Mantri Mudra Yojana (PMMY) Scheme, more popularly known as Mudra Loan Scheme. These Non-Performing Assets (NPA) has reached the figure of ₹11k crores (i.e.₹110000000000) in first three year of the launch of the scheme. The ever increasing arrears under Mudra Loan Scheme are numbers of concern. It is already more than 36 months and need to scrutinise the banks process of loan approval. The RBI already put its concern ahead of the Lok Sabha elections about bad loans to the government.

What Might have went wrong?

  • The PMMY scheme is one of its kind to support startups and provide financial boost to Micro, Small and Medium enterprises. The Banks were busy in achieving loans disbursal Targets.

  • The pressure environment of meeting the targets had to relax the verification process and focus on Mudra Loan approval and disbursement.

  • Hence at many occurances the respective banks did not perform well in the verification and validation of the loan-seeker, thus now making it difficult for the banks to retrieve the loan amount from defaulters.

Brief about the Pradhan Mantri MUDRA Yojana (PMMY)

  • The PMMY scheme was initiated in April 2015. The scheme’s preliminary objective is Restructure collateral-free-loans provided by the lenders to micro to small borrowers or loan-seekers.
  • The scheme as beefed up with ₹20,000 crores at its disposal and it may lend small amounts between ₹50,000 and ₹10 lakhs to micro, small and medium enterprises/entrepreneurs.
  • Designated banks and Microfinance Institutions (MFI’s) are enabled to draw funds under the MUDRA scheme, once they become registered member lending-institution of the MUDRA yojana.
  • Banks and MFIs can draw refinance under the MUDRA Scheme after becoming member-lending institutions of MUDRA.
  • Mudra Yojana is specially for activities other than agriculture, these non-agricultural activities may get loan approval upto ₹10 lakhs. Activities such as Bee Keeping, Dairy, Poultry Farms are also consider under the PMMY Scheme or Mudra Yojana.
  • This scheme has a unique features that issues Mudra-Card which allows withdrawal of necessary working capital from ATM machines.

Types of Loans under PMMY:***

  1. Shishu (loan up to ₹50,000).
  2. Kishore (starting from ₹50,001 to ₹5,00,000).
  3. Tarun (starting from ₹500,001 to ₹10,00,000)

Purpose/Goal of the Scheme

  1. Fund the unfunded

    • Individuals who are into business or has a business plan to generate income from non-farm activities such as manufacturing, processing, packaging, trading (except financial) or services delivery model based business, but lacks access to funds or has low funds or has no funds can ask for loans up to ₹10 lakhs under MUDRA yojana.
  2. Micro finance institutions (MFI) Monitoring and Regulation

    • In association with MUDRA banks, the network or series of microfinance establishments will be under continuous monitoring, they shall also be responsible for new registration and inward application.
  3. Promote Financial Inclusion

    • Financial inclusion with the objective to access last mile credit delivery to micro businesses in remote places, this can be achieved with the help of technology and services.
  4. Reduce Jobless Economic Growth

    • Seeing economic growth is the ultimate resolution and agenda of any nation on earth, but Jobless economic growth is pure evil in long run. MUDRA yojana is aimed to provide sustainable financial solution to small entrepreneurs in order generate employment as well as self employment, and collectively increase GDP.
  5. Integration of Informal Economy into Formal Sector

    • It would assist India in its tax base growth as incomes from the informal sector (eg. temporary & casual jobs, unpaid jobs or jobs for work experience, subsistence farming, multiple job holding for livelihood and mere survival) are non-taxed.

Important Links (External)

  1. Banks to review mudra loan book - The Indian Express.
  2. Pradhan Mantri Mudra Yojana (PMMY) - Official website.
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Summary of Mudra Yojana

  • MUDRA is aimed to push financial outreach. Diligence processes have not been made adequately robust to support smooth facilitation of the same.Banks, in their quest to complete ‘targets’ lend under MUDRA without sufficient background checks, thereby leading those sanctioned loan amounts to become NPAs

Problems

  1. Piling up of NPAs will eventually have a tipping point and the government will have a crackdown at the middle class, increasing their tax slab
  2. That, in turn will lead to market instability and might wipe out huge money from the indian markets.
  3. It will also force RBI to step in with measures to regulate liquidity

Potential Solutions:

  1. Strengthen the due diligence process before lending loans: For industries, use holistic manufacturing indices to ascertain sustainability of industries in order to understand their loan repayment ability.
  2. Overall capacity building of sectors to which MUDRA loans are loaned out, needs to be done.
  3. More channels and products of repayment need to institutionalised by banks for smoother repayment.
  4. Thrust sectors need to be targeted to secure minimum defaults.
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