India Markets open in 3 hrs 58 mins

Some concerns at growing level of NPAs among Mudra borrowers: RBI

On September 19, RBI Governor Shaktikanta Das hinted there could be more reduction in the rate in the near future. (Express Photo by Tashi Tobgyal)

Reserve Bank of India Deputy Governor MK Jain on Tuesday warned bankers about the growing stress in Mudra (Micro Units Development and Refinance Agency Ltd) loans and asked them to monitor such loans closely as unsustainable credit growth in the sector can risk the system.

“Mudra loans are a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of non-performing assets among these borrowers,” Jain said at a Sidbi conference on microfinance. Banks need to focus on the repayment capacity at the appraisal stage itself and monitor loans through the life cycle of the account much more closely, Jain said.

Gross NPAs under Mudra rose by 68.7 per cent to Rs 16,480.87 crore for the financial year ended March 2019 from Rs 9,769 crore a year-ago.

Pradhan Mantri Mudra Yojana (PMMY) was launched in April 2015 for providing loans up to Rs 10 lakh to small and micro enterprises. These advances which are given by commercial banks, regional rural banks (RRBs), small finance banks, cooperative banks, micro finance institutions (MFIs) and NBFCs are refinanced by the government. Total disbursements were Rs 311,811 crore as of March 2019.

Explained

Concern: Systemic risk from unsustainable credit growth

An Over 68 per cent rise in non-performing assets (NPAs) in MUDRA loans has prompted the Reserve Bank of India to warn bankers about growing stress in such loans. While the government push for these collateral-free loans led to banks pursuing sharp growth in their exposure to MUDRA loans, the RBI is concerned that systemic risk may arise from unsustainable credit growth.

“Systemic risk may arise from unsustainable credit growth, increased inter connectedness, pro-cyclical and financial risks manifested by lower profitability,” Jain said. It is interesting to see leading e-commerce companies tying up with banks and NBFCs to offer working capital loans to their suppliers, that are mostly micro and small enterprises, at competitive terms, he said.

Stating that GST has hit the informal economy significantly, he said, “as a result of the improved digital footprint, MSMEs have become attractive clients for banks, NBFCs and MFIs, thereby reducing their dependence on informal source of funds.” The cost of credit for MSMEs will also come down meaningfully as lending will shift from collateral based lending to cash flow based lending, he said.

Noting that technology has its own share of risks and challenges for the financial sector regulators and supervisors, he said, “early recognitions of these risks and initiating action to mitigate the related regulatory and supervisory challenges is key to harnessing the full potential of these developments”.

The government, in July, informed Parliament that total NPA in the Mudra scheme of over Rs 3.21 lakh has jumped to 2.68 per cent in FY19 from 2.52 per cent in FY18. Since inception of the scheme, over 19 crore loans have been extended under the scheme up to June 2019, the government had informed. Of the total, 3.63 crore accounts are in default as of March 2019.

Focus of the MFI sector must be on digital finance, Jain said, adding data confidentiality and consumer protection are major areas that also need to be addressed by them. “Keeping in view the need to increase transparency, address customer-centric issues and safeguard the interest of low income customers, micro finance lenders must put the interest of their clients first and implement the code for responsible lending,” he said.

MFIs must also broaden their client outreach to reduce the concentration risk in their own interest and to serve a wider clientele base. From a financial inclusion perspective MFIs should critically review their operations so other regions don’t remain underserved, he said. ——WIth PTI