Mudra loan: Fund the deserving

June 18, 2019 2:07 pm

Announced with the theme ‘funding the unfunded’, Mudra loan was launched after identifying the importance of self-employment people and small business units. However, the red flag alert from RBI has been raising waves of concerns. A quick analysis by the industry experts discuss what they think of the Mudra loan and the concern hovering over NPAs

India is a land of talented and budding youngsters, held back just because they have neither the opportunity nor the finances to show the world what they have in store. With MUDRA, a lot of skilled and creative brains were to be empowered to take India to a whole new level on the international frontier. Until now, most of the SME/MSMEs out there used to face credit crunch issues as non-profit micro financing institutes often failed to provide capital to small businesses and commercial banks abstained from investing in them as they lacked performance history and legacy, owing to their newness.

Mudra (Micro Units Development and Refinance Agency Limited) Bank, formed in April 2015 by the then Government of India’s Union Budget aimed to provide integrated financial support to the SME/MSME. After identifying the importance of self-employment people and small business units, the Government of India launched MUDRA Yojana to address the financial and other constraints that has been continuously persisting in the Indian industries. The main objectives of Mudra Bank were to encourage entrepreneurs and small business units to expand their capabilities and operations, to reduce over indebtedness and to provide formal credit system.

The far reaching effect of the scheme can be seen in how it increases the confidence of educated and skilled individuals who will now get the chance of becoming first generation entrepreneurs and existing start-ups will also be able to expand their business through this capital. However, this is just one part of the coin.

The other side of the coin
With RBI raising the red-flag on the spike in non-performing assets (NPAs) under the government’s flagship scheme to support micro enterprises in the country, MUDRA loan is right now hogging the headlines for all the ‘not so good’ reasons. The key objective behind the scheme was to refinance loans without collaterals of upto 10 lacs that are provided by lending institutions to non-corporate small borrowers, for income-generating activities in the non-agricultural segment such as manufacturing and servicing.

Bad loans under Mudra Yojana have jumped almost 53 per cent to ₹14,930.98 crore during the first nine months of the current financial year 2018-19, as compared to 9,769.99 crore reported in last year (as per reports). The small business loans disbursed under the MUDRA loan have fallen short of the target set for 2018-19. Against a target of ₹3-lakh crore, only ₹2.73-lakh crore was disbursed as on March 31, 2019, according to government data.

‘X’ amount to ‘Y’ number, but what does ‘Y’ does with the ‘X’ amount?
What happens with the Mudra loan once it has bene handed over, one have absolutely no idea? All you know in Mudra loans is that we have given ‘X’ amount of money to ‘Y’ number of people and you have no idea what they have done with it. This makes it difficult to make a statement on Mudra loan’s effect on the India’s employment.
However, for starters, industry insiders say expansion of Mudra loan scheme can be a good option as liquidity is a major hurdle for start-ups. There are 3 aspects, one is the decisive parameters in terms of offering the loan i.e. in terms of the industry innovation, technical interventions and also the execution. Sudeep Sen, Head of Industrial, Manufacturing & Engineering Vertical, TeamLease Services says, “If all these three aspects are convincing then it is a matter of time for them to be able to do the repayments, the policy was rushed and filter is the key here. “

The Mudra refinance loan scheme has played a fair role in machine tool business as the minimum investments needed from a MSME CNC job shop is well above 10 Lakh which is the limit of the simpler “Tarun” scheme. There has been a lot of interest generation and few machine sales too. It has created a buzz among people considering entrepreneurship. T K Ramesh, MD and CEO, Micromatic Machine Tools says, “My belief is that it is spurring entrepreneurship and will be a game changer in a year or two. Repayment issues need to be reviewed and addressed in all lending programs and is more to do with building in competency on project evaluation and execution.”

Muralishankar Sambasivam, President, AIFI says, “The main reason to bring about Mudra loan was to give loan to the deserving people without collateral, enabling them to start their industries and overcome any capital difficulties in doing so. But, now-a-days what happens is that repayments of these loans are cause of concern.” Not all the people who get Mudra loan are genuine. Some people take advantage of the loan given to them; some of them also use it as a bridge loan. However, if the concerned authorities take proper measures then this misuse of the loan would come to an end.

One of the major reasons for the government to take this initiative was to reduce the troubles of debt financing people in the SME and MSME market. However, there are certain issues which needs to be addressed. Mohini Kelkar – DIRECTOR – Grind Master Machines Pvt. Ltd says, “Seeking collateral security from the beneficiaries is not mandatory under Mudra Yojana, this may prove to be bad economics if large number of loans are not repaid. Secondly, the average disbursed amount under this scheme is less than 50,000 which is very less amount even for MSME start-up. Still in my opinion, it can be a game changer and great help for MSMEs but certain changes have to be done in the scheme.”

However, Mudra has restored the confidence of people in the system as there is no discrimination for getting loans under the scheme. It has brought many underprivileged citizens into financial mainstream with NBFCs and microfinance institutions coming on board. Even if loans are sought by business owners genuinely seeking growth and bankers disburse them with an eye on economic development, ensuring repayment is still a challenge. First, these loans are unsecured — a collateral that could protect the interests of the bank is not required, unless an asset that is purchased can itself serve as collateral. Mayank Tripathi – Area Sales Manager – Hurco India Pvt. Ltd says, “The scheme is meant for those who need small amounts, but do not have access to such funds, but the very nature of the business of such borrowers is susceptible to volatility and annual cycles, not to mention the itinerant ways of some business owners, such as vegetable vendors.”

Maulik Patel, Executive Director, Sahajanand Laser Technology Ltd. says, “The policy was to encourage MSME sector to upgrade current infrastructure and capabilities. I believe the current scenario is a by-product of lenient policy and regulation.”

The way ahead!
Certain things would definitely change with Mudra, helping more and more people to become self-employed. This would also lead to an increased market of the domestic/ indigenous products, capitalising the export market. The financial support in the form of various loans encourages people to start new ventures and thereby empowering them. Its impact in developing a strong economy will be seen in the coming years. The specific or more specialised financial institution for serving the credit need of the micro enterprises including SME/MSMEs is the need of the hour.