The rather credible leaks from the finance ministry suggesting that the Reserve Bank of India (RBI) has red-flagged the sharp increase in non-performing assets (NPAs) under the government’s flagship scheme to support micro enterprises in the country ~ the Pradhan Mantri Mudra Yojana (PMMY) ~ is more than a little worrisome. India’s micro units, in particular, have a critical role to play in keeping the country going, employing millions and literally providing the backbone to what is the world’s sixth-largest economy (nominal GDP).
The Mudra (Micro Units Development & Refinance Agency) loans were supposed to finance non-corporate, non-farm sector income generating activities of micro and small enterprises with credit needs under Rs 10 lakh. However, the suspected delinquency ~ another report by Cibil and Sidbi says that risky loans worth Rs 1.2 lakh crore to micro, small and medium enterprises (MSME) in the system could potentially create NPAs of Rs 16,000 crore by March 2019 ~ puts paid to hopes of a vibrant MSME space through Mudra.
Yet it is essential that this sector does well and moves up the value chain through technological sophistication and productivity growth and Mudra, which came with a credit guarantee fund trust that makes collateral-free credit to micro and small enterprises, was a part of a scheme to enhance credit flows to them under the supervision of competent bankers. That over a three-year period the scheme has returned as a threat ~ the RBI reportedly assesses bad loans under PMMY at Rs 11,000 crore ~ bears testimony to how such schemes are planned and executed.
There is little doubt that the seeds of failure were contained either in the scheme or the political motivation behind it, because sound economic motivation would not have driven mission Mudra to such dire straits so quickly. The basic problem may have been an overreach to achieve pre-set targets within a limited span of time, forgetting that sound banking should have demanded that the sanctioning officers be allowed to do their job in terms of assessing needs and the ability of enterprises to repay after having put the loans to productive use.
It would be wrong to accuse banks of not having used their commercial judgment when they were to be judged on a target achievement criterion. Indeed, overall NPAs from the MSME sector were 14 per cent for public sector banks against four per cent for private sector banks in 2018, indicating poor governance issues.
Statements in Parliament suggest a very fast pace of increase in Mudra loans, which precludes careful financial assessments in circumstances obtaining in India that would have led to a reality check on the markets that these enterprises were addressing. It is no secret that there has been an economic deceleration in India, driven by a frail rural economy leading to headwinds in the macroeconomic environment that they would face. This would have merited great caution instead of disbursing credit in a loan mela kind of environment unless that was the real intent.