Facts and fiction of Mudra loans

Do we need yet another refinance agency? No one will shed a tear if Mudra is given a decent burial,

Bharatiya Mahila Bank Ltd is one initiative that the United Progressive Alliance government is definitely not proud of. The Bharatiya Janata Party government may soon have a similar feeling for the six-year-old Mudra, a wholly owned subsidiary of Small Industries Development Bank of India (Sidbi), launched by Prime Minister Narendra Modi in April 2015.

Its goal is to develop the micro enterprise sector by extending various kinds of support, including financial, to microfinance institutions (MFIS), banks and others who lend to micro units.

There’s also a scheme for such loans: Pradhan Mantri Mudra Yojana (PMMY). Three types of PMMY loans — Shishu (up to ~50,000), Kishore (~50,001~500,000) and Tarun (~500,001-~1,000,000)

— are given for income-generating non-farm sector activities, including dairy and poultry. The catch is that such loans don’t need to be financed or refinanced by Mudra.

Any and every loan, given by banks and non-banking financial companies (NBFCS), including MFIS, can get the Mudra tag.

In the first year, ending March 2016, close to 34.9 million Mudra accounts were opened and the outstanding loan portfolio was ~1.09 trillion. Shishu led the way with 32.4 million accounts and a ~46,811-crore loan kitty; Kishore had 2.07 million accounts (~36,612 crore); and Tarun, 0.41 million accounts (~25,869 crore).

Going by the Reserve Bank of India (RBI) data for small loans up to ~200,000, in 2015, there were close to 35 million borrowers and ~79,209 crore outstanding loans with banks and MFIS, given for purposes similar to those covered by Mudra. A year later, the PMMY loan portfolio below ~500,000 (Shishu and Kishore) was ~83,424 crore, distributed among 35.1 million accounts. If 80 per cent of Kishore loans were up to ~200,000, then there were 34.06 million customers with ~76,101 crore loan outstanding.

So, even after tagging all micro loans as Mudra loans, the credit flow at the lower tier, up to ~200,000, dropped in 2016 from the previous year.

Since then, the growth has been uneven. From 34.9 million accounts and a ~1.09-trillion portfolio in 2016, the number rose to 39.7 million accounts and ~1.38 trillion loan outstanding in 2017. In 2018, the number of accounts rose to 48.1 million and the loan book grew by over 46 per cent, to ~2.02 trillion.

The growth story continued in 2019 but the pace slackened; and in 2020, the loan book grew less than 3 per cent (~2.67 trillion). In Covidhit 2021, there was a sharp drop in both loan accounts and disbursements. The outstanding loan data for the financial year is not yet public but the disbursements show close to a 6 per cent drop — from ~3.3 trillion in 2020 to ~3.11 trillion.

Public sector banks, with 4.92 per cent bad loans in the Mudra basket, are not excited about hawking the scheme since borrowers have the tendency to default on loans given under a government scheme. But there is no escape. This is true of MFIS, too. In 2020, ~57,865 crore for 19.6 million MFI loan accounts was classified as Mudra loan. Most borrowers are not aware of this, while the MFIS wonder why such loans are called Mudra when they hardly get any funds from Mudra.

A Labour Bureau study on employment generation by Mudra loans that was slated to be released in March 2019, ahead of the last general election, was held back and the Bureau was asked to reconcile the data. The report, released in October 2019, showed that over 11 million jobs were created by PMMY between 2015 and 2018. Media reports, however, suggest that the first draft of the study, which was not released, told a different story.

Sidbi launched Mudra as an NBFC, following the February 2015 Budget announcement. The plan was to position it, in due course, as a development financial institution and a refinancing agency combined — ala Sidbi, National Bank for Agriculture and Rural Development (Nabard) and National Housing Bank — through an Act of Parliament. The draft Mudra Bill also envisaged it as a regulator for the MFIS but that did not happen.

By January 2016, the government decided that it should be a bank and not an NBFC but the RBI shot down the proposal as an NBFC cannot wear a bank’s robe without a licence.

As a refinancing agency, Mudra’s track record is not flattering. In 2016, out of ~3,337 crore refinance, the MFIS got around 18.5 per cent.

In 2017, their share rose to 22 per cent but dropped to less than 5 per cent in the next two years before rising to 23.3 per cent in 2020 when Mudra refinanced ~4,000 crore. In five years, till 2020, it disbursed ~25,494.65 crore of which ~3,018.5 crore, or 11.84 per cent, flowed to the MFIS. During this period, Mudra’s refinance was just 2.13 per cent of the loans disbursed by all lenders under PMMY.

A 2019 RBI inspection found that Mudra was allotted ~40,000 crore under Priority Sector Shortfall Fund (PSSF) since its inception but only ~22,500 crore had been drawn by it. “…It is lacking in achieving its objective/ mandate to provide refinance support to banks, NBFCS and MFIS for loans under PMMY and ultimately support to micro/small enterprises,” the inspection report says.

By 2021, the total amount drawn from RBI under PSSF dropped to ~20,084 crore. In a pandemic year, when the RBI and the government went all out to ensure easy flow of funds to grease economic activity, Mudra, blissfully unaware of the ground realities, slept on a heap of money that could have been used to support MFIS, NBFCS and other institutions starved of funds.

Banks are to channel 40 per cent of their loans to the small and medium enterprises, agriculture and other segments under the socalled priority sector norm. The shortfall in meeting the priority loans target, which the banks used to keep as deposits with Nabard and Sidbi, is given to Mudra.

Incidentally, Sidbi dismantled its wing, SIDBI Foundation for Micro Credit (SFMC), in 2019 and transferred its ~271 crore India Microfinance Equity Fund (IMEF) to Mudra. The foundation was launched in 1999 to develop microfinance, and the fund was floated in 2011 to support small MFIS with equity and quasi-equity. I wonder whether Mudra has supported any small MFI as yet. It is governed by a truncated board without the full complement of independent directors.

The most charitable way of describing Mudra would be as an agency financing and refinancing micro lenders modestly, using the priority sector shortfall fund — simply a repeat of what Sidbi and Nabard do. Neither has it done anything for micro enterprise development nor for MFI capacity building. Do we need yet another refinance agency? No one will shed a tear if it’s given a decent burial.

The most charitable way of describing Mudra would be as an agency financing and refinancing micro lenders modestly, using the priority sector shortfall fund — simply a repeat of what Sidbi and Nabard do

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Story

To read his previous columns, please log on to www.bankerstrust.in Twitter: Tamalbandyo