The initial signs are promising and the design improvements made seem to be working on the ground, though whether Mudra is a game-changer or not, we’ll only know know by the time the Union Budget for 2017-18 is presented
In the 2015 budget, Finance Minister Arun Jaitley had announced the launch of Pradhan Mantri Mudra Yojana for refinancing and developing micro units – small individual and enterprise borrowers – who usually find it difficult to get loans from Indian banks. While the Jan Dhan Yojana was about increasing banking penetration and financial inclusion, this scheme provided the complimentary view on the ability to use credit to grow small businesses.
Mudra (Micro Units Development and Refinance Agency) was launched by Prime Minister Narendra Modi on 8 April, 2015 – one of the earliest schemes from the 2015 budget to be made operational. The initial corpus for refinancing was set at ₹20,000 crore where the initial refinancing rate was around 6.7 percent. The corpus was to be used over four years.
Since then, MUDRA has been converted into a subsidiary of Small Industries Development Bank of India (SIDBI). The government has also approved setting up a credit guarantee funds against MUDRA loans budgeting for a credit off take of ₹100,000 crore under the three buckets (Shishu – loans up to ₹50,000, Kishor – loans between₹50,000 and ₹500,000, and Tarun – loans between ₹500,000 and ₹10,00,000). The fund operated by National Credit Guarantee Trustee Company Ltd. has been set up with an initial corpus of ₹3,000 crore.
MUDRA refinances banks and microfinance institutions (MFIs) and non-banking finance companies (NBFCs) for the loans they extend under this scheme, with more than 150 institutions included under the scheme. The government owned banks were set targets for disbursing these loans with the 2015-16 target of ₹122,000 crore. The banks have managed to approve lending of ₹72,000 crore till mid-January and while the target may not be met fully for the year, the approval figures will end up close to the target by the time the financial year ends.
The Shishu category of the loans has the highest share of approvals at about 40 percent while the Kishor and Tarun categories have an approximate share of 30 percent each currently. The financial institutions which have availed of the refinance to the maximum extent are Bank of Maharashtra, Indian Overseas Bank, and State Bank of Travancore.
The MFIs have been more active at seeking refinance with large players like SKS Microfinance, Ujjivan, and Equitas participating. Of the approved ₹5,000 crore refinance in the first year, the participating institutions have drawn around ₹2,000 crore so far. The need for refinance may not have been felt with the relatively low credit growth in the economy and with financial institutions avoiding locking their lending rates with respect to the refinance rate they can avail of from MUDRA.
The scheme has been availed of by around 1.7 crore borrowers, and with an average household size of 4.8 individuals, the scheme touches 6.5 percent of the country’s population. Small ticket loans were always available via the banks – at least in theory. So what’s the difference this time? Based on conversations with a few beneficiaries of the MUDRA loans as well a few bank managers who have sanctioned these loans, a few things stand out.
The first difference is the relative ease of establishing identity and bona fides. One big challenge in Indian banking world for those without multiple identity and address proofs is to prove that they are who they claim to be. This is a complicated process just for opening bank accounts, let alone for availing banking asset products.
With the Jan Dhan Yojana in place and the instances of Aadhar seeding increasing – albeit voluntarily given that the mandatory linkage of Aadhar is limited by Supreme Court directions – this first procedural hurdle of approaching a bank and initiating a conversation has been eased. For MUDRA loans over ₹200,000, the number of identity and address proofs required and the Know Your Customer (KYC) process does not ease, but those availing a higher ticket size loan are also more likely to be able to comply with these norms.
Getting credit for small businesses usually means making a mockery of the “going concern principles” – banks almost always insist on personal guarantees and minimum turnover to approve loans. One has to first show that one has enough capital or assets to not require a loan before the loan can be approved! This catch-22 can be resolved by availing loan against property or by finding guarantors to secure the loan. All in all, the probability of a small business or a first time entrepreneur qualifying for a small ticket seed capital loan has traditionally been minuscule.
With MUDRA, where banks have targets to fund new businesses and there are no collateral requirements, the only hurdle is to convince the credit officer or the bank manager that the borrower should be lent money. This is a function of business plan viability, personal credentials and of course a discretionary credit decision process, which is a part of any lending activity. All of these were traditionally necessary, but not sufficient.
In MUDRA, the necessary conditions become the sufficient ones in most cases, easing the pain of the borrowers. Another traditional area of harassment for borrowers has been banks asking the borrower to purchase a life insurance policy and make the bank the beneficiary to cover the mortality risk. With the refinance and now the credit guarantee fund in place, this requirement seems to have gone away too for borrowers.
Another great operational feature which links back to the Jan Dhan Yojana is the delinking of the approval from the disbursement. Using Rupay denominated debit cards, the borrower can draw the right amount of money required for their business requirements. The withdrawal as well as the repayments can be made on a daily basis and the lenders are being instructed to calculate interest accordingly.
The operational features thus make the process simpler for the real small borrowers – those looking for ₹200,000 or below. As per the National Sample Survey Organization (NSSO) data, India has close to 6 crore small and medium size enterprises. There are several individuals who aspire to set up small businesses but can’t mostly due to credit limitations. MUDRA seems to be the most beneficial for the smallest borrowers from this huge potential universal set of borrowers. Based on various discussions with the bank managers and credit officers, about 70percent of the applications coming in for MUDRA loans are approved on an average.
Any credit scheme which encourages low margin, high volume lending will have its pitfalls. There have been reports of loans being disbursed to relatives of bank officers or unworthy recipients. These are areas where the finance ministry cannot really put any effective checks and balances – ultimately the credit decision resides with the individual banks. But this is not a MUDRA specific problem – the quality of credit decision process in India has anyway not been very rigorous in the last decade, as the extent of stressed assets in the banking system shows.
Banks have also been demanding higher percentage coverage for potential nonperforming assets (NPAs) and coverage of trading firms – small firms which have limited physical assets but high working capital requirements and hence are prone to higher number of frauds – under the credit guarantee fund. As the fund scales up over the next few months, it remains to be seen exactly how the guarantee process will function.
The first set of loans approved and disbursed will complete a year in the next few months. The biggest success of the scheme will be if these loans continue to pay their equated monthly installments (EMIs) on time beyond this initial first year period. The repayment structure is specific to each loan, and hence the data on the level of NPAs can only be collected and analyzed with some rigor towards the end of 2016. If the initial set of borrowers stays true to their loan repayment terms, it will increase the confidence level of banks to cast a wider net when approving MUDRA loans in the future.
The central government, specifically the ministries like Finance, MSME, Renewable Energy, Textiles, and Agriculture, should spend quality time and effort educating people about MUDRA. The scheme can also get a leg up if the elected representatives help popularize it in their respective Lok Sabha or assembly constituencies – especially talking about success stories – stories which let individuals become financially independent.
So is MUDRA a gamechanger? We will know by the time the Union Budget for 2017-18 is presented. As long as the 2015-16 loans are repaid, the lending process should further improve over time. The initial signs are promising, and the design improvements made seem to be working on the ground.
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