Mudra scheme: Smoke and mirrors
Is the government’s push to increase lending to micro and small enterprises making a difference?
The short answer is no.
Indian banks haven’t turned any friendlier towards small businesses even though the current bad loan mess has arisen from large borrowers. Small businesses continue to be seen with a beady eye and data from the banking sector only underscores this trend.
The share of micro and small loans in total non-food credit has hardly moved; in fact, it has slipped a bit in the last three years. Chart 1 shows that the share of loans to micro and small enterprises was 12.63% as of 3 March, down from 13.33% at the end of fiscal year 2014-15. The year-on-year growth in such loans too is slowing down.
The thrust on lending to micro and small units is back with the government’s new scheme that goes by the moniker of Pradhan Mantri Mudra Yojana. Started in 2015, the scheme envisages helping lenders to go the last mile by providing refinance for loans up to Rs10 lakh disbursed by banks.
The Mudra website shows that Rs5 trillion has been disbursed by banks, microfinance companies and non-banking financial companies since the inception of the scheme. Indeed, it is easy to measure the success of the scheme through disbursals of loans but lenders have historically been giving out small loans anyway. Given that the business model of microlenders is to give such loans, the thrust of Mudra as a special scheme seems irrelevant.
The relevance of the Mudra scheme is in the refinance support that the Mudra agency extends toward such disbursals. The progress here leaves much to be desired. The outstanding refinance provided by the government as of March 2017 was just Rs6,114 crore or not more than 2% of the cumulative disbursals for the first two years. For 2018-19, refinance provided during the current year is not available in the public domain but analysts reckon that the agency doesn’t have the bandwidth to increase this exponentially.
The main reason why banks are wary of lending to small borrowers is the bad loan rates in this segment. Small Industries Development Bank of India’s quarterly report MSME Pulse shows that as of December 2017, the non-performing assets ratio for loans up to Rs10 lakh which the government pushes under Mudra was 11.5%. Moreover, microloans (up to Rs50,000) both in terms of number of beneficiaries and total disbursals have fallen year-on-year.
To be fair, the duress on lenders through Mudra has made them lend more than they probably would have to the smallest borrower. But the progress is just a shadow of what is advertised.
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