About a month ago, this newspaper carried an editorial lauding the rapid progress of Mudra Bank based on figures put out by Finance Minister Arun Jaitley. He claimed that Mudra had already advanced over Rs 24,000 crore to over 3.7 million micro enterprises and he expected advances to cross Rs 1.2 lakh crore by the end of the current financial year, to over 12.5 million borrowers. "By the yardsticks of even the most efficient organisations, this is a phenomenal achievement", said the editorial, arguing that "by the standards of India's public institutions, even the well-run ones, this seems to be a creditable record, matching the pace at which bank accounts were opened under the Prime Minister's Jan Dhan Yojana." As we all know, the Mudra Bank, an acronym of Micro Units Development and Refinance Agency Bank, was launched on April 8 this year to give loans to small businessmen.
However, in the third week of October, another business paper reported that Mudra Bank could miss its 2015-16 target. It has managed to sanction just about 30 per cent of its annual target in the first half of the fiscal as the demand for loans remains weak. In the first seven months of the current year, the Mudra Bank has disbursed about Rs 37,000 crore to over 60 lakh entrepreneurs, according to the data put out by mudra.org. Between September 25 and October 2, ministers were engaged in a mega countrywide campaign to spread the Mudra message.
While Mudra may miss its ambitious "target", even Rs 37,000 crore of disbursement is impressive. The question is: How did Mudra Bank disburse such huge amounts as loans when it got started in April with just Rs 5000 crore of capital and is still functioning as a subsidiary of Small Industries Development Bank (SIDBI), while the Mudra Bill is still pending to be passed? Well, the disbursements came from the State Bank of India and its five associates (10.32 per cent), 21 other public sector banks (50 per cent), 16 private sector banks (23.91), 56 regional rural banks (15.15 per cent) and two foreign banks.
So, when someone claims that "Mudra Bank has disbursed..." it builds an attractive narrative to propagate politically, but is not accurate. As far as I can see, all the money will come from the existing banking system, with Mudra providing the branding and marketing with the help of the government. At some stage it will provide significant refinancing to banks provided that Mudra itself has enough of resources to support the rapidly expanding "Mudra loans" of banks.
All this leads to many questions. Did the public sector banks give these loans as part of their normal commercial activity, or as a special dispensation to make the Mudra scheme work? Did the private sector banks classify their normal commercial lending to small businesses to meet Mudra loan targets? What was value addition by Mudra Bank to these loans? Are these loans commercially viable? If so, such loans are already part of the normal commercial activity of the lending institutions under various existing schemes including priority sector lending. If not, we know from experience, forced lending does not work, which leads us to another set of questions - about bad loans.
All these are small loans ranging from Rs 50,000-Rs 10 lakh. In fact, Mudras's mandate is to ensure that "at least 60 per cent of the credit flows to Shishu Category Units (Rs 50,000-Rs 1 lakh) and the balance to Kishor and Tarun Categories (Rs 1 lakh to Rs 10 lakh)". What kind of credit assessment have the banks done before lending the money? What kind of collateral have the banks asked for? From the Mudra website one could gather that "emphasis shall be on cash flow based lending and not security based lending. Collateral securities, etc. shall be avoided. Repayment obligations shall be flexible and framed keeping in view the business cash flows of the entrepreneur." If the loans are not backed by collateral, will it set up a moral hazard, that is, send a message to the borrower that the bank cannot force the borrower to repay? Even if Mudra steps in to play its main role of refinancing at some stage, the responsibility for the bad loans remains with the banks.
Mudra has signed up with a variety of lending institutions to make the "scheme" work. While, public sector banks are expectedly enthusiastic supporters of Mudra, conspicuous by their absence among the list of disbursers are the 36 microfinance institutions and 25 non-banking financial companies that have signed up with Mudra. Indeed, the biggest MFIs such as Spandana, Share Microfin, Asmitha, Shri Kshetra Dharmasthala and Bhartiya Samruddhi Finance have not even signed up with Mudra Bank, as per its list of partner institutions. One of the reasons why MFIs and NBFCs are cold to Mudra is pointed out by a research report from Religare Securities. It says that the RBI's mandate that banks should utilise Mudra funds to lend at base rates and NBFCs/ MFIs restrict their spreads to six to 10 per cent, "renders the refinancing scheme untenable, considering the high operating and credit costs involved in unsecured microfinance lending." For banks, this will be at cost of funds (COF) + 0.75 per cent; for co-operative or regional rural banks it is COF + 3.5 per cent; and for NBFCs or MFIs it is COF + four to six per cent. This implies "lending rates of 16-18 per cent for NBFCs and 20-22 per cent for MFIs. This renders Mudra refinancing unattractive."
All the above factors contribute to the poor economics of the Mudra scheme. When Mudra was announced I had pointed out that the there are dozens of schemes and institutions (at the Centre and states) engaged in supporting small traders, manufacturers and farmers. These need to be folded into Mudra. So, why was Mudra announced without any reform and restructuring of dozens of existing schemes and institutions? A possible pointer could the announcements that I see on the black boards of a political party at street corners in Mumbai. It exhorts unemployed youngsters to get forms of Mudra loan from the party office; no security required for getting the loan. As of now, Mudra is more politics and less economics.
The writer is the editor of www.moneylife.in