MUDRA Loans: What Went Wrong?
The concerns on the rising non-performing assets (NPAs) in Micro Units Development and Refinance Agency (MUDRA) loans have been red flagged by the regulator, Reserve Bank of India (RBI) starting with Dr Raghuram Rajan, followed by the current governor Shaktikanta Das and MK Jain, deputy governor of RBI.  This only demonstrates the seriousness of the issue.  
 
The NPAs in MUDRA saw a steep jump of 126% in one year – an increase from Rs7,227crore in FY2018 to Rs16,481 crore in FY2019, with the number of infected accounts totalling 30.57 lakh. India Ratings and ICRA estimated the NPAs under MUDRA between 10-15% as compared to 5.39% in March 2018.
 
 Since the Vijay Mallya scam, surging corporate NPAs are now in the company of their less endowed MUDRA borrowers propped up by the government and so economy slowdown should have nothing to contribute to this sordid story.
 
What went wrong with MUDRA loans?  
 
Ever since the scheme has been flagged off in April 2015, the targets were not only set but closely driven, breathing down the necks of the banks by the ministry of finance, to emphasise the importance attached to the scheme.  Bankers have exhibited more than the required enthusiasm and competed with one another to achieve the targets to dwarf their peers before the Delhi bosses.  
 
While massive numbers are to be achieved within set deadlines, it appears that the appraisal was given a go-by as hinted at by Mr Jain, the deputy governor of RBI, urging the banks to monitor the repayment capacity of borrowers before disbursement.  All the targets, which increased year after year - were achieved by not only the public sector banks (PSBs) but other participants too.  
 
The total sanctions under MUDRA till March 2019 since inception stood at Rs8.92 lakh crore.   The speed at which these loans are sanctioned can be noticed from the fact that Rs18000 crore worth of sanctions were pushed during the last 8 days of FY2019 to achieve the target.  During FY2019 an amount of Rs970 crore was sanctioned per day by all MUDRA lending institutions together.  
 
Coverage of these loans under the Credit Guarantee Fund for Micro Units (CGFMU) up to Rs10 lakh could be another reason for sloppy appraisal. It is amply clear that these are push loans without proper appraisal and due diligence of the borrower.  Informed sources say that bankers chose this route to ‘evergreen’ (a loan that does not require the principal amount to be paid off within a specified period of time) their small ticket loans!  
 
The numbers reveal different facts, however.  Of the total sanctions, the new loan sanctions hovered around 26%, barring the first year of introduction when it stood at 36%.  Can we draw a conclusion that the renewals/existing loans accounted for a larger share probably owing to the evergreening process of existing loans with increased limits?  More than 70% of the loans are sanctioned under ‘Shishu’ (not exceeding Rs50,000), considered least risky in the portfolio.  
 
While banks can finance up to Rs10 lakh under the scheme, they preferred to keep the average ticket size to less than Rs1 lakh.  To be more precise, the average ticket size of the MUDRA loan increased from Rs39,405 in FY 2016 to Rs52,739 in FY2018.  State wise disbursals also indicate unequal distribution that needs correction too.
 
In a way it is a blessing in disguise because the slippages and NPA accretion could otherwise have been higher.  But the only issue that remains in such small ticket loans is the adequacy of finance and the resultant viability.    
 
During the current fiscal 29 million loans were disbursed, amounting to Rs1.41 trillion, showing a slight slowing down, against Rs3 trillion in the previous fiscal. Not even 2% has been sanctioned to the manufacturing enterprises because that involves onsite verification and follow up.  
 
The positive part of the story is employment creation.  As per an unpublished survey a total of 11.2 million new jobs were created in 2015-18, of which 5.1 million were of new entrepreneurs. If the government were not to push for targets, banks would not have touched this clientele with a barge pole. It is however doubtful whether, given a free hand, the banks would improve the quality of portfolio, since NPAs are seen surging ahead as everywhere else they had a free hand. . The banks’ eye on quality has much to do with their knowledge, skills and attitude. All the three seem to be at a low ebb.
 
The JanDhan scheme, accompanied by savings and insurance, and MUDRA, led by credit with refinance and guarantee, are two schemes of the most acclaimed inclusive agenda of the NDA government. The micro-finance institutions (MFIs) and the small finance banks that also lent heavily along with the public sector banks (PSBs) in MUDRA realized that they did not have much to lose as the money to lend came from the refinance window while the post-disbursement losses are guaranteed. Since the funds to MUDRA are from the Union Budget, the losses arising from the scheme devolve on the taxpayer. 
 
RBI would do well to commission a detailed study of the portfolio and take corrective measures to ensure that the inclusive agenda of the government would not get undermined and the taxpayer is saved of the undue burden of the scheme.
 
(Dr B Yerram Raju is an economist and risk management specialist while Sitapati Sarma is a retired general manager of SBI and the present chief operating officer of the Telangana Industrial Health Clinic Ltd. The views are personal.)
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    COMMENTS

    Sandeep More

    1 week ago

    Probably the beneficiaries are expecting loan waivers, given that the political leaders keep on falling upon themselves to do the needful, that too very consistently. Most of the beneficiaries could be of the opinion that such loans are sanctioned so as to get an opportunity to waive them off at the right time.

    tanay

    1 week ago

    Which bank has the highest mudra loan npa?

    REPLY

    B. Yerram Raju

    In Reply to tanay 1 week ago

    SBI and PNB

    Ramesh Poapt

    1 week ago

    of of many big bang syndrome!

    Notes in circulation have increased since demonetisation
    The notes in circulation (NIC) in the economy have increased to Rs 22,420 billion in November 2019, as compared to Rs 17,741 billion on November 4, 2016, just before Prime Minister Narendra Modi announced the demonetisation measure, according to latest data.
     
    While this implies an increase in notes even after demonetisaion, Minister of State for Finance Anurag Thakur, however, said in a reply in Parliament on Monday that demonetisaion and digital cash initiatives succeeded in reducing the notes in circulation by as much as Rs 2,934.80 billion rupees.
     
    The logic for this given by the government is that NIC had grown at an average growth rate of 14.51 per cent year-on-year from October 2014 till October 2016.
     
    At this rate, the NIC would have increased to Rs 25,354.93 billion as on November 25, 2019. As the actual NIC on the said date is only Rs 22,420 billion, demonetisation followed by digitalisation and reduction of cash use in the informal economy has succeeded in reducing NIC by as much as Rs 2,934.80 billion.
     
    Thakur said that the government decided to cancel the legal tender status of Rs 1,000 and Rs 500 notes on November 8, 2016, with several objectives, including flushing out black money, eliminate fake Indian currency notes, to strike at the root of terror financing and left wing extremism, to convert the non-formal economy to a formal one with a view to expand the tax base and employment and to give a big boost to digitalisation of payments to make India a less cash economy.
     
    Thakur also claimed that demonetisation resulted in curbing of the counterfeit currency. 
     
    The Reserve Bank of India (RBI) has reported that 7.62 lakh pieces of counterfeit bank notes were detected in the banking system during 2016-17, 5.22 lakh pieces in 2017-18 and 3.17 lakh pieces in 2018-19.
     
    Demonetisation also resulted in significant impact in most theatres of violence in the country. Since illegally held cash forms the major chunk of terrorist funding, after demonetisation, most of the cash held with the terrorists turned worthless.
     
    In addition, during November 2016 to March 2017, the Income Tax Department conducted search and seizure operations leading to seizure of Rs 900 crore.
     
    To further substantiate the benefits of demonetisation, the government said there has been an increase in employment. It quoted the Statistics Ministry's Annual Survey of Industries for the fiscal ending March 2018 which shows an increase in the jobs in the organized manufacturing sector.
     
    During 201-15 to 2017-18, the total number of workers has increased by 14.69 lakh and total persons engaged has increased by 17.33 lakh in the organised manufacturing sector in India. 
     
    Apart from this, 285.3 lakh members joined the Employees Provident Fund Scheme (EPF), 310.3 lakh joined the Employees State Insurance (ESI) scheme and 15.7 lakh joined the National Pension Scheme (NPS) during September 2017-19.
     
    The government has also alluded to the significant increase in the use of digital payments in the country since demonetization. In fiscal 2016-17, the total number of digital transactions were 1,023 crore, which increased to 2,070 crore in the next year with a jump of 104 per cent and to 3,133 crore in 2018-19, recording a jump of 51.35 per cent.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    COMMENTS

    nadeem

    1 week ago

    The best defence of any blunder is.... denial.

    Sandeep More

    1 week ago

    Definitely. We have to pay bribes even to get the connection of Municipal water supply pipes at our Society. We refused, so we are not getting municipal water supply for our Society consisting of 184 Flats for the past 3 1/2 years. However, the builder took pity on us and arranged for temporary connection for a single individual only by installing water pipes which the municipality promptly appropriated for themselves.

    The Govt servants are happy that the Govt facilitated underhand money by way of high denomination notes. These require less storage space

    ksrao

    1 week ago

    Introducing Rs.2000 notes is a monumental folly perpetrated at a huge cost. The Minister does not speak about the fact that corruption and black money have increased because of these notes. The govt ignores the ground realities and plays with some statistics.

    Nakul Kumar Reddy

    1 week ago

    Ur supposed me do mostly digital payments.

    Rating of Credit Rating Agencies: The New Imperative
    It is three decades since the CRISIL Rating has commenced its operations and a decade since Brickworks did the same. We also see the frequent sovereign ratings of Standard & Poor's (S&P), India Ratings and Research (Ind-Ra) from the Fitch Group and Moody’s. Very recently, finance minister Nirmala Sitharaman, in the wake of serial failure of well rated corporates – Dewan Housing Finance Corporation Ltd (DHFL), Infrastructure Leasing & Financial Services Ltd (IL&FS) and several other public sector units (PSUs) as well as private companies, voiced her serious concern. Sovereign ratings are also not infallible.
     
    This article examines the present status and suggests modifications.
     
    Credit rating agencies (CRAs) are expected to play an important role in mapping the risks in the financial system. They facilitate investment decisions and can help investors in achieving a balance in the risk return profile. They assist firms in accessing capital at low cost. Allocative efficiency of capital across the sectors, and appropriate risk pricing would be the gain to the economy. Information asymmetry to an extent is resolved. 
     
    “A credit rating is technically an opinion on the relative degree of risk associated with timely payment of interest and principal on a debt instrument. It is an informed indication of the likelihood of default of an issuer on a debt instrument, relative to the respective likelihoods of default of other issuers in the market. It is therefore an independent, easy-to-use measure of relative credit risk.”i 
     
    If a bank chooses to keep some of its loans unrated, it may have to provide, as per the extant RBI instructions, a risk weight of 100% for credit risk on such loans.
     
    Basal regulations provide for supervisors increasing the standard risk weight for unrated claims where a higher risk weight is warranted by the overall default experience in their jurisdiction. Further, as part of the supervisory review process, the supervisor may also consider whether the credit quality of corporate claims held by individual banks should warrant a standard risk weight higher than 100%.
     
    The working of the entire rating system was questioned after the sub-prime crisis resulted in collapse of not just Fannie Mae and Freddie Mac but even UBS Credit Suisse, Citi group and Deutsche Bank. This led the US Fed and the Wall Street to revamp the entire rating mechanism, after a careful review of the processes they followed and the measurement they gave to different parameters. But such changes are not followed uniformly across nations.
     
    Theoretically, internal credit scoring models are effective instruments for the banks in loan origination, loan pricing and loan monitoring.  But the banks’ rating architecture is different from the rating agencies and this is one of the reasons for the regulator to insist on a rating review mechanism to be part of the banks’ credit risk management committee.  
     
    The rating process involves assessment of business risk arising from the interplay of five factors: industry risk; market position, operating efficiency, financial risk and management risk. While industry risk and market position can be assessed from the macro level data, operating efficiency and management risk can be captured by observation, frequent interactions and experience. Unless cross functional, sectoral, trade data from all sources are available on a digital platform and that too, unless verifiable easily, the rating agencies are bound to err. 
     
    As per Basel II (2000): “An internal rating refers to a summary indicator of risk inherent in an individual credit. Ratings typically embody an assessment of the risk of loss due to failure by a given borrower to pay as promised, based on the consideration of the relevant counter party and facility characteristics.  A rating system includes the conceptual methodology, management processes and systems that play a role in the assignment of a rating.”  Understandably, there was a collapse of the rating instrumentality looking at the collapse of the corporate credit and investments almost without notice.  
     
    One of the common failings noticed by informed circles, for example, has been, a firm that owes to the micro, small and medium enterprises (MSMEs) more than Rs2lakh should have been rated lower than those that would have paid promptly.
     
    Most corporates - both public sector units (PSUs) and private companies were chronic defaulters and this came to surface more prominently in all the National Company Law Tribunal (NCLT)-dealt with cases. Second, poor governance should have got bad rating. But the banks, PSUs and private companies despite having fared badly, got good ratings!
     
    Ever since rating is mandated by the RBI while extending credit, we have seen phenomenal failures in the well-rated corporates both in the private and public sectors, e.g., DHFL, IL&FS. Smalll and medium enterprises (SMEs) have no option but to get the rating of one or the other agency and yet, the concerned bank would have its own rating that would decide the quantum of credit. 
     
    Measuring policy risks, sovereign risks and governance risks is the major challenge and this challenge has become visible in the recent corporate rating failures. Banks severely compromised by pitching high on CIBIL ratings and particularly, the individuals and directors of the companies. The thirty-year old CIBIL needs to amend its ways if the ratings book should be cleaned.
     
    Technology disruption, easy regulations governing payment platforms, data on merchant performance, changes in consumption patterns, differential product regulations across the nations for similarly placed products and increasing protectionism are all the new risk areas for capture by the CRAs. 
     
    In so far as the Indian financial sector is concerned, consolidation following the merger of public sector banks (PSBs), failure of non-banking financial companies (NBFCs), urban cooperative banks, and the lackluster performance of the micro finance Institutions (MFIs), metro-centric banking are all new challenges to the CRAs. Telecom regulations and their interface with the payment and settlement systems, internet of things, block-chain technologies are the new disruptors and even a moderate margin of error can impact heavily and the rating can collapse.
     
    Further, product regulations have also become dynamic. In a way, all these aspects seem to have their shadow cast on the rating instrumentality as a risk mitigant. 
     
    There is therefore an imminent need for a high level committee of the Securities Exchange Board of India (SEBI), RBI, the Pension Fund Regulatory and Development Authority (PFRDA), the Insurance Regulatory and Development Authority of India (IRDA), and the Telecom Regulatory Authority to examine the methodologies of CRAs for a more reliable rating process and pricing of rating agencies. 
     
    (Dr B Yerram Raju is an economist and risk management specialist and can be reached at [email protected]. Also see my blog post on 11 June 2011 on the subject.) 
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    COMMENTS

    S Balakrishnan

    2 weeks ago

    The author's faith in the institutions mentioned is touching.
    If only things were that simple. With honesty, competence and purpose, it would be different.
    No lack of brains. Missing is integrity in the fin system from top downwards.

    R Balakrishnan

    2 weeks ago

    Passing the buck. Instead of lenders doing their work, why do we want to regulate an opinion business? If there is a fraud, go after them. Do you regulate the business of the stock brokers for their stock recommendations?

    Nakul Kumar Reddy

    2 weeks ago

    I will accept any help from your side,

    I will give u 10/10 ratings .

    REPLY

    B. Yerram Raju

    In Reply to Nakul Kumar Reddy 2 weeks ago

    Thank you.

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