Last week, the Reserve Bank of India (RBI) Governor Shaktikanta Das met the CEOs of public sector banks (PSBs) and warned them against rising non-performing assets (NPAs) under Pradhan Mantri Mudra Yojana. This was the third such warning since January 2019 against the NPAs piling up under the government’s flagship scheme to provide loans.
Under the Mudra scheme, launched in April 2015, NPAs jumped to ₹17,250.73 crore as on March 2019, the government informed Parliament on July 16, 2019. In March 2018, bad loans under the scheme stood at ₹7,277.32 crore, indicating a 137 per cent jump.
The scheme provides loans up to ₹10 lakh to the non-corporate, non-farm small/micro enterprises and are distributed by commercial banks, regional rural banks (RRBs), small finance banks, and non-banking financial companies (NBFCs).
Under the scheme, a borrower can avail loans in either of the three categories — Shishu (for loans up to ₹50,000), Kishore (for loans up to ₹5 lakh) and Tarun (for loans above ₹5 crore). According to Mudra website, a significant chunk of loans is distributed under the Shishu category. Loans under this category stood at ₹1.4 lakh crore at the end of March, 2019, accounting for 45 percent of the total loans disbursed in a year. Loans distributed under the Kishore category stood at ₹99,868 crore, forming 32 per cent of the total disbursed loans, whereas Tarun loans accounted for the remaining 23 per cent of the total loans at ₹72,000 crore.
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One of the major reasons for rising NPAs under the scheme is that a majority of the first-time borrowers under the Shishu category use the money for consumption purposes rather than business purposes if banks do not monitor it. Some face business failures leading to inability to repay the loan.
Inefficiencies in lending practices also cater to the rising NPAs. Usually, bankers tend to take a lighter approach towards schemes blessed by the government, especially during election season. Such practices under the Mudra scheme can cost the bank heavily as large number of people take smaller amount loans.
Thus, the RBI has been warning the banks to pay attention to loans disbursed under the Mudra scheme so that the NPAs do not become another major source of pain for the banking sector.
Even though, bad loans under the scheme accounts for just 2 per cent of the total loan disbursed under the scheme, the rate at which the NPAs are growing is a matter of concern for the RBI. The central bank has been taking several steps to free the banking system from NPAs, which impacted banks’ ability to lend in the previous years.
In 2018, the RBI also introduced Prompt Corrective Action (PCA) framework under which it monitored the capital ratios, asset quality and profitability of 11 PSBs with weak financial metrics. Five banks — United Bank of India, UCO Bank, Central Bank of India, Indian Overseas Bank and Dena Bank — are still under the PCA framework.
Moreover, the government has been pumping capital in banks to help these banks stay afloat and boost lending. In the last financial year, the government infused ₹1.09 lakh crore in public sector banks. Since 2017, the government has pumped in around ₹2.69 crore, which is double the amount invested in the first 45 years (estimated to be around ₹1.5 lakh crore) since the country’s banks were nationalised.
The fast-growing NPAs under the Mudra scheme may become fatal as the banks are still recovering and trying to reduce their NPAs.
In September 2018, former RBI governor Raghuram Rajan had said that loans under the Mudra scheme and the Kisan Credit Card needed to be examined “more closely” for potential credit risk. In June last year, a joint study by SIDBI and credit bureau TransUnion CIBIL, revealed that while NPA rates under MSME segment remained stable between March 2017 and March 2018, indicating there was a looming threat.
“These high-risk exposures are expected to add ₹16,000 crores in NPA by March 2019,” the report noted about the NPAs under the Mudra scheme.