RBI red-flags rising Mudra loans stress

New Delhi/MUMBAI: Concerned over the unexpected growth of non-performing assets (NPAs) in Mudra loans, the central bank on Tuesday cautioned banks that some risk in the system could emerge from the space in the future, and hence, banks should monitor such loans.

“The growing stress in Mudra loans, which has crossed more than Rs 3.21 lakh crore system-wide, and banks need to monitor such loans closely as unsustainable credit growth in the sector can risk the system,” Reserve Bank India (RBI) Deputy Governor M.K. Jain said.

While addressing a Sidbi event on micro-finance in Mumbai, Jain said, “Mudra loans are a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of NPAs among these borrowers.”

Prime Minister Narendra Modi had launched the Mudra scheme in April 2015 to offer speedier credit up to Rs 10 lakh to small businesses, which are non- corporate, non-farm small/ micro enterprises and which normally do not get bank funds due to their poor or mostly no credit rating. These loans are extended by banks, NBFCs, RRBs, cooperative banks and small finance banks.

Interestingly, it can be recalled that within a year of the launch of the scheme, the then RBI governor Raghuram Rajan had warned of asset quality troubles bubbling in the scheme but the then finance minister Arun Jaitely had brushed aside the concerns.

The government had in July informed Parliament that total NPA in the Mudra scheme of over Rs 3.21 lakh crore has jumped to 2.68 per cent in FY19 from 2.52 per cent in FY18. Since inception of the scheme, over 19 crore loans have been extended under the scheme up to June 2019, the government had said. Of the total, 3.63 crore accounts were in default as of March 2019.

However, according to an RTI reply, the bad loans in the Mudra scheme soared a whopping 126 per cent in FY19—jumping by Rs 9,204.14 crore to Rs 16,481.45 crore in FY19 from Rs 7,277.31 crore in FY18. “Systemic risk may arise from unsustainable credit growth, increased inter connectedness, pro-cyclical and financial risks manifested by lower profitability,” Jain said.

“It is interesting to see leading e-commerce companies tying up with banks and NBFCs to offer working capital loans to their suppliers, that are mostly micro and small enterprises, at competitive terms,” he added.

Stating that GST has hit the informal economy significantly, he further said that as a result of the improved digital footprint, MSMEs have become attractive clients for banks, NBFCs and MFIs, thereby reducing their dependence on informal source of funds. “The cost of credit for MSMEs will also come down meaningfully as lending will shift from collateral based lending to cash flow based lending,” he said.