RBI blames banks for Mudra loan defaults; bankers say can't help

The Reserve Bank of India (RBI) has held banks’ poor credit appraisal responsible for their high bad debts arising out of Mudra (Micro Units Development and Refinance Agency) loans, according to sources.

RBI Governor Shaktikanta Das  also discussed the issue in a meeting with public sector bank (PSB) chiefs on Friday. 

Bad debts for Mudra loans have spiked for PSBs, and, at the end of 2018-19 (FY19), stand at 9.3 per cent of advances. Loans under the Pradhan Mantri Mudra Yojana (PMMY) were Rs 3.22 trillion in FY19, according to the PMMY website.

So far in 2019-20, loans disbursed under Mudra have amounted to Rs 49,216 crore. The RBI has told banks that bad debts have risen from 4.35 per cent of advances in 2016-17 to 9.3 per cent in FY19. Banks, according to the RBI, did not follow adequate credit appraisals, did not ensure the end-use of funds, or monitor the loans. 

There was a significant rise in the number of wilful defaulters in small loans, called the Shishu category, banking sources quoted an RBI communication. 

There are three categories of loans under Mudra: Shishu, covering loans up to Rs 50,000; Kishor, covering loans above Rs 50,000 and up to Rs 5 lakh; and Tarun, covering loans above Rs 5 lakh and up to Rs 10 lakh.

According to RBI estimates, NPAs in Shishu amounted to 12.39 per cent of the loans, and in the Kishor category, they were about 10.19 per cent.

NPAs in the Tarun category are at par with the default rate for banks — 8-9 per cent.

Mudra loans are given without collateral. The RBI’s worry is also because a committee headed by former Securities and Exchange Board of India Chairman U K Sinha suggested doubling the collateral-free loan limit to Rs 20 lakh. The recommendations have not been accepted by the government yet, but will likely be in the near future. This will put additional pressure on banks. 

In the meeting with the RBI governor, bankers said they didn’t have the manpower to chase errant borrowers and complained about the loans targets set by the government and the RBI. Bankers told Business Standard that often the staff at branches was too eager to give loans, just to meet the target. 

“Once the loan is given, there is virtually no effective mechanism that can be employed to get the repayment,” said a banker.

Banks have recovery agents and business correspondents, but often they are local people and the borrowers don’t take them seriously. 

The bankers asked Das if there could be agencies to work as specialised recovery agents on the basis of commission. However, that is unlikely to get RBI approval.

NOT ENOUGH BOOTS ON GROUND

| Poor credit appraisals, lack of monitoring responsible for spike in bad loans

| There are substantial number of wilful defaulters in smaller-value loans

| Bankers worried that doubling Mudra loan limit to Rs 20 lakh would worsen the NPA mess

| Not enough boots on ground to monitor end-usage of loans, say bankers