MUDRA LOANS – SHOWING THE MUDRA OF 'DANGER'

about 17 days ago
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An employee in a nationalised bank was recounting this experience.

When asked how they were coping with mounting NPAs? Have the loans to people come down drastically? That would be the prudent thing to assume, right?

She said, “Loans under the regular process have come down but then people are walking in for Mudra loan and walking out with Rs.50,000; it has become so easy. I was left wondering whether all this money, literally being handed out with no kind of checks and balances which are required for a normal retail loan, will ever come back?”

She is just a junior level clerk at the bank but even she could see that this has the potential to become a big NPA crisis in the coming years.  

And she was 100% right!  This July, the RBI had cautioned banks on the rising NPAs in Mudra loans. It was not alarming then. RBI had said then that there needs to be a system in place to monitor the Mudra loans’ end-use, cautioning banks on rising defaults, mainly on the back of poor assessment of borrowers’ creditworthiness.

In July, Govt stated in the Parliament that the NPA on Mudra loans jumped to Rs.17,251 crore as at 30th March 2019 v/s Rs.7277 crore (Y0Y). Gross NPA of these Mudra loans was at around 2%, which is much less compared to the close to 10% reported by nationalised banks. But if you look just purely as a YoY rise, the NPAs have risen 137%.

This does not come as a surprise at all because look at the kind of basic documentation required to get a business or rural business loan –

  • Mudra application Form
  • BIL/RBC application form
  • Photo identity and age proof
  • Address proof
  • Ownership proof of residence/office
  • Business vintage proof
  • Bank statement (last 12 months)
  • Income tax return (last 2 years)

And if you want a vehicle, it could not have been any easier. All it requires is:

  • Mudra application form
  • Vehicle loan application form
  • 2 passport size colour photographs
  • Photo Identity proof
  • Address proof
  • Income proof
  • Bank statement (last 6 months)

No collateral of any kind is required for any kind of loan under this scheme. No third party guarantee is also asked for. Thus it’s really as easy-peasy as that to get this loan. The idea was to make it easy so that medium and small scale enterprises do not suffer, get the money quickly and start their business.  And frankly, till some time, the repayments were also ok but it is only now, with the slowdown becoming more pronounced that repayments have started floundering.

There are three categories of loans under Mudra – ‘Shishu’ loan, which forms the giant portion of the money disbursed, is upto Rs.50,000. Under ‘Kishore,’ loans up to Rs,5 lakh are given and Rs.10 lakh is under ‘Tarun.’ 45% loans are disbursed under Shishu, 32% under Kishore and 23% under Tarun.

Loans under Shishu are at the biggest risk as it’s a small amount taken by people from the lowest bracket and the banks have no way of monitoring the end-use of the money taken. In all probability it is taken for consumption purposes rather than the stated business purpose, which is usually stated as to set up a paan shop or sell fruits and vegetables or buy cattle. Also when it’s just Rs.50,000, the banks approach is very lackadaisical and many a times, checks are very loose. There is also the need to keep up with the target set by the Govt for Mudra loan disbursals and that is the only vision in sight with little attention paid to creditworthiness. Thus in many ways, banks are merely handing out money.

RBI has warned banks gently about the potential danger in rising Mudra NPAs but if not put in check right now, this too could balloon into another NPA crisis. On one end of the spectrum, Kisan Credit as such is giving banks a big headache and on the other end, the industrial bigwigs are looting the banks too. And now there is threat from Mudra loans too blowing up in the face.

Taking or rather, being forced with social responsibilities is one thing but to do that at the cost of one’s own business is foolhardy. Banks need to be more watchful or this Mudra will come to bite.

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