Has cash ban reversed the gains of PM Modi's pet MUDRA scheme?

Aimed at giving loans as low as Rs 50000, MUDRA beneficiaries could now be the worst hit

In his first full-fledged budget in February 2015, Finance Minister Arun Jaitley had announced the setting up of MUDRA (Micro Units Development & Refinance Agency Limited). Consequently, Prime Minister Modi announced the Pradhan Mantri Mudra Yojana (PMMY), a scheme meant to provide easy capital up to Rs 10 lakh (Rs 1 million) to small and micro enterprises.

The disbursements under this scheme since its inception has been rather impressive. But for reasons unknown, the money given out under this scheme has not increased overall credit offtake among small and micro industries in the economy since its launch in March 2015.

Under the scheme, Rs 1.32 lakh crore were disbursed during 2015-16 to almost 35 million small and micro enterprises. These amounts were divided into three categories: those with loans of up to Rs 50000, those with loans between Rs 50000 and Rs 5 lakh and those with loans up to Rs 10 lakh.  Almost 32 million or almost 90 per cent of the people given loans under this scheme fell in the first category. The lowest category of borrowers received almost Rs 62000 crore as credit - almost half of the total credit under the scheme. 

But despite these active interventions by the Modi government, overall credit growth in this sector has been falling since 2015. In March 2015, the outstanding credit for small and micro industries stood at Rs 3.8 lakh crore. By March 2016, the outstanding credit fell to almost Rs 3.7 lakh crore. According to the Reserve Bank of India (RBI) statistics, the outstanding credit in November 2016 further slipped to Rs 3.4 lakh crore.

Even though analysts have been pointing to the debilitating impact of demonetisation on the small and micro sector, the overall bank credit offtake seems to have been sliding much before that. So has this much-vaunted scheme of doling out more credit to micro enterprises failed?

Not exactly if we look at how micro finance institutions have stepped in where banks have feared to tread. Lending to such small borrowers with doubtful credit-worthiness has always been a no-go area for banks. That’s where the Modi government’s scheme has come to the rescue. Most of the lending under this scheme seems to have been done by micro finance companies.

A look at data released under the scheme shows that micro finance institutions (MFIs) have been the biggest lenders to the small and micro sector in 2015-16. Most of these MFIs are also Non-Banking Finance Institutions (NBFCs). There were 39 MFIs that lent almost Rs 44,000 crore to 23 million people during the year. More than 95 per cent of the borrowers took less than Rs 50,000 in loans. It is not clear what these loans are meant for, but given that a majority of people borrowed such low amounts, they indicate credit taken for meeting working capital requirements rather than new investment. Public sector banks (excluding SBI and its affiliates) were not far behind MFIs but lent to a substantially smaller number of people. The 2015-16 annual report of MUDRA also states that most of these loans were incremental.

There also has been a massive jump is credit extended by these MFIs since the Modi government came to power. The Gross Loan Portfolio (GLP) of various MFIs was constant between 2010-11 to 2013-14. In 2014-15, the loans extended by MFIs jumped almost 64%. In 2015-16, the loans extended by MFIs further increased by 40%.  

One of the reasons for this buoyancy in lending by MFIs is that they now enjoy direct funding by MUDRA. The refinance agency which is a subsidiary of the Small Industries Development Bank of India (SIDBI) pumped Rs 616 crore in MFIs in 2015-16. Moreover, banks, ever weary of lending to high-risk low profile borrowers, extended loans to MFIs to be further disbursed to small borrowers. MUDRA in turn also helps refinance many scheduled commercial banks to borrow to this sector. In 2015-16, MUDRA refinanced 16 public sector banks to the tune of almost Rs 2400 crore to enable them to lend to the sector at base lending rates.

A look at the geographic distribution of credit under PM Modi’s MUDRA scheme also paints a peculiar picture. More than a third of the credit under the scheme has gone to just three states – Karnataka, Maharashtra and Tamil Nadu. These states are one of the relatively prosperous ones in India and also have a strong penetration of MFIs in the rural hinterland. Backward states like Bihar, Chhatisgarh and Jharkhand collectively got almost Rs 12000 crore, which is just 9 per cent of the total credit under the scheme.

However, the hit taken by this sector because of demonetisation is still unknown. Reports from across the country suggest that it is the small and micro enterprises that have been worst hit by the government’s demonetisation move. With many workers having to go without wages and most of these small borrowers unable to access cash, all the good work started with the launch of Modi’s pet scheme faces the prospect of being undone.  Most severely hit was the unregistered sector which largely relies on cash payments. The 2015-16 annual report of Ministry of Micro, Small and Medium enterprises shows that the unregistered sector comprises 60 per cent of all such units and is primarily concentrated in rural areas. This sector contributes almost half of India’s exports and therefore plays a crucial part in employment generation.  Their growth since 2010-11 has been in double digits. Data available till September 2015 shows that in 2014-15, the sector registered a growth of almost 19 per cent. The economic survey that will come out a day before the budget on February 1 this year will also reflect these impressive figures. But, the impact of a decline in output in this sector and the number of small creditors who have been pushed into the default zone because of demonetisation would be only known much later.