Better margins, claim settlement can boost bank lending under PMMY

An elongated guarantee claim settlement process and tighter loan reporting requirements appear to have hobbled the Pradhan Mantri Mudra Yojana (PMMY), which promotes collateral-free lending to micro enterprises, thereby supporting the larger agenda of inclusive finance.

A close look at disbursals under the scheme throws up some challenges. For one, with just two months to go in the current financial year, disbursements stand at Rs0.89 trillion, as against a target of Rs 1.80 trillion. Also, microfinance institutions (MFIs) account for over a third of the loans. Besides, according to data for financial year 2016, the economically backward states of Bihar, Jharkhand and Odisha accounted for less than 12 per cent of the loans even as the more developed Karnataka, Tamil Nadu and Maharashtra got nearly a third.

All this points to the reluctance of banks to cater to the “missing middle” segment. The reasons are not far to seek. First, inadequate credit history on small businesses and the tedious process involved in claim settlements discourages banks from extending credit to micro and small enterprises. Second, the risk-reward mechanism under the refinance component of PMMY favours MFIs over banks and NBFCs. Lending margins for banks and NBFCs remain capped at about three per cent and six per cent, respectively, compared with 10 per cent for MFIs. Third, loans of up to Rs0.5 lakh are largely unsecured loans to women borrowers extended by MFIs. The top three states have greater penetration of MFIs, which have led disbursements under the sub-Rs0.5 lakh loan category.

Says Manish Jaiswal, Business-Head - SME Ratings, CRISIL, “PMMY can evolve into a long-term, structurally efficient model by addressing two key concerns: 

(1) A review of pricing caps for banks and NBFCs in order to enhance their participation under the scheme; and (2) an efficient and expedient claim settlement process which operates on the principles of insurance shield and at the same time ensures lenders have enough skin in the game.”