Surge in MUDRA Loan

In Context

• Public Sector banks are experiencing a sharp surge in the proportion of Mudra loans turning into non-performing assets (NPAs).
• The prime reason behind such a trend is the impact of Covid on incomes and repayment capacity of borrowers.

Status of the Problem

• More than three times increase in MUDRA loan related NPAs in past 1 year:
  • Gross NPAs in the Mudra loan book is estimated to have reached around 20 per cent at June-end 2021 from around 6 per cent at March-end 2020.
  • Out of total Mudra loans of Rs 11,357.14 crore, Rs 1,055.53 crore or 9.29 per cent have turned into NPAs as on June-end 2021.
• Multiple States Affected:
  • In a key state like Maharashtra, for instance, SBI’s NPA on Mudra loans is at 59 per cent as on June-end 2021.
    • Public sector banks’ Mudra loan NPAs in Maharashtra have jumped to as high as 32 percent at June-end 2021, from 26 percent at June-end 2020.
  • Canara Bank reported an NPA as high as 114.35 per cent in Jharkhand as on June 30, 2021.
  • A similar trend is seen in other states such as Gujarat and Uttar Pradesh.

• Maximum Stress in SBI
  • After SBI, the highest proportion of NPAs among public sector banks in the state has been recorded by
    • Punjab National Bank at 44 per cent, 
    • Indian Bank at 33 per cent and 
    • Bank of Maharashtra at 31 per cent at June-end 2021.
• Even Private Banks are affected but to a lesser extent
  • Among private sector lenders, HDFC Bank’s Mudra loan NPA in Jharkhand was at 26.21 per cent, followed by IDFC First Bank at 24.93 per cent. 
  • Of HDFC Bank’s outstanding Mudra loans of Rs 208.69 crore, Rs 54.70 crore (Around 25%) has turned into NPA as on June-end 2021.

• Rise in Mudra Loan
  • The rise in NPAs comes alongside an increase in disbursement under the scheme- from Rs 3.11 lakh crore in 2018-19 to Rs 3.29 lakh crore in 2019-20.
• NPA in asset-backed Mudra loans
  • Even in asset-backed Mudra loans, such as those taken for buying income-earning equipment and vehicles, the stress has been rising.
  • In these loans, there is kind of a collateral built in. 
  • These are always best performing in terms of repayment, but now NPAs have built up there too.

Reason Behind such Trends

• Pandemic Hard Lockdown:
  • It’s obvious that jobs and incomes of people have been hit at the bottom of the pyramid, which is the target audience of Mudra loans.
  • Now this is showing up in data as repayments get affected and delinquencies rise
• Not Paying Heed to RBI’s Warnings due to Government’s Pressure:
  • The RBI has been cautioning banks repeatedly on the scheme, asking them to adequately assess borrowers’ repayment capacity.
• Dilemma in Front of Banks of To give loan or not:
  • The banks are also mandated to lend a certain amount to MSMEs.
  • If they don’t lend they have to be accountable for not sanctioning enough loans whereas if they lend, they are blamed for a casual attitude towards NPA.
• Out of scope of Credit Guarantee Fund for Micro Units (CGFMU):
  • The Credit Guarantee Fund for Micro Units (CGFMU) set up by the Central Government provides lenders guarantee against loan losses in Mudra loans.
  • But the extent of the spike in NPAs is higher than the cover being provided.
  • In April, 2020, the Government had increased the guarantee to 75 percent of NPAs in Mudra loans, from 50 per cent earlier. 
    • But the cap on guarantee payout has been kept at 15 percent of total loans.

Way Ahead

• Bad Bank or ARC as was proposed in Economic Survey
• Proper Framework to Access the Borrowers Paying Capacity
• Loan Moratorium for the Sector can be provided.

Source: IE