A dummy's guide to Mudra Loans

A week back, Anurag Thakur, the Minister of State for Finance and Corporate Affairs stated that total bad loans in the Mudra scheme stood at about 3%. And considering many people have asked us to do a story on Mudra, it seems like the most opportune moment to talk about it.

So here goes.

The Story

Now if you are new to the Mudra saga, here’s an explainer of sorts that can help you better appreciate what’s happening here.

The Prime Minister of India launched the Pradhan Mantri Mudra Yojana (PMMY) in 2015 to foster growth and generate large scale employment in this country.

The idea is simple. You give young men and women in this country an opportunity to nurture their entrepreneurial spirit and they’ll drive job creation for you. To this effect, the government ensures they are given access to collateral-free loans (Mudra Loans) and through it, the initial capital needed to kickstart operations. Once they are fully set up, they can pay back the loan in full and work towards sustaining their fledgeling business venture. This way the country can help lift micro-enterprises from the depths of despair and thrust them into a position of influence. The idea is flawless. However, the execution.

That’s where things get tricky.

Mudra loans are categorised into three large buckets — Shishu (containing loans up to ₹50,000), Kishore (above ₹50,000 and up to ₹5 lakh) and Tarun (above ₹5 lakh and up to ₹10 lakh). Ideally, you would want to see banks maintain a nice balance between the three. However, that isn’t the case. Last year (FY19), almost 88% of the loans were disbursed under the Shishu category. Now we don’t know a lot about the average loan size here but it's safe to presume that it's anywhere between ₹20,000 and ₹30,000

Now, this poses a unique problem. While 30,000 is no chump change, it’s hard to imagine how this money could be used to build sustainable businesses anywhere. In fact, many folks have been contesting that people often borrow money under the presumption that they won’t have to pay back in full considering the scheme is being promoted by the government. And so, even if the borrower had no intention of fully floating a business with the 30,000 investment, he is still going to give it a shot if he thought it was free money. And of course, when the poor chap does, in fact, come to the realisation that he still owes money, he is pushed into a debt trap that involves borrowing an even larger sum from the local moneylender and the vicious cycle continues.

The second problem is with categorization. Under the Prime Minister Mudra Yojana, the RBI has set aside about 20,000 Crores. And if you are a state-run bank trying to offer loans under the Mudra scheme you can do that by borrowing from this 20,000 crore corpus at cheaper rates and better terms.

However, Anurag Thakur in his written reply to a question on the Mudra Yojana suggested that the total amount disbursed under the program amounts to a whopping 6 lakh crore. So how does one disburse 6 lakh crores from a corpus of 20,000 crores exactly?

Well, for one, any collateral-free loan worth < 10 lakhs offered to a small and micro-enterprise is categorised as a Mudra loan irrespective of whether the banks borrow from the 20,000 crore kitty or not. In fact, more often than not, it’s the government that decides whether a loan disbursed by a bank is a Mudra loan. Now although there’s nothing wrong with this categorisation per se, it still muddies the water a bit. Many people are under the impression that the Mudra Yojana has suddenly managed to pump in lakhs of crores to further job creation in this country when in reality most of these loans were being disbursed anyway. The only difference is that they are now being called-Mudra loans. It leaves a bad taste, that's all.

And of course, these problems haven’t exactly gone unnoticed. Many have been arguing for a while now that Mudra loans could further exacerbate the bad loan problem in this country. There have been scores of articles written on the number of people defaulting on their payments after borrowing under the Mudra scheme and how banks are worried about the festering issues here. Hell, even the RBI recently talked about the NPA epidemic and why banks need to monitor Mudra loans very closely.

But despite all this, Anurag Thakur said that the total Mudra NPAs (bad loans) stood at just 3% of total loans disbursed last year (FY2019). Now 3% isn’t exactly a great number. But considering most state-run banks are carrying bad loans to the tune of ~10%. It starts looking pretty phenomenal all of a sudden.

Hmmmmmm………….

Guess we are all getting worked up for no reason then eh?

Anyway, that’s it from us. We will see you tomorrow.

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