Relevance: MUDRA loans, Loan mela
Synopsis: Mudra loans have generated no jobs, resulting in misspending of trillions of taxpayers’ money. The loans were supposed to be for a three- to five-year period. The first cycle of the experiment is over, and the result has been disastrous.
Recently, the Chairman of the State Bank of India (SBI), told that 20% in its loan portfolio under the Pradhan Mantri Mudra Yojana (PMMY) scheme had turned bad.
Mudra loans were launched six years ago. They are collateral-free or unsecured loans of up to ₹10 lakh extended to micro and tiny businesses. However, the idea of such “equitable lending” has been tried before and had failed miserably.
This very same desire to ensure fairness in lending, drove socialist Indira Gandhi to nationalise banks and force them to lend to “priority sectors”.
But government control over banks led to large-scale corruption and their repeated recapitalisation through taxpayers’ money. This further reduced the money available for small businesses.
Criticism of MUDRA
- In 2018, when the economy was stagnating, Mudra was publicised as a job-generation scheme. However, since 90% of the loans were issued under the Shishu category (less than ₹50,000), they could not have generated many jobs. Besides, the default rate for Shishu category is the highest.
- Mudra was a populist and political move to give away money. Not surprisingly, almost immediately bad debts started piling up and so, the scheme remained a headache for the Reserve Bank of India (RBI) and banks. From 4.35% of Mudra advances in 2016-17, bad loans shot up to 9.3% in FY19, as political parties organised camps to canvass Mudra loans for their supporters.
- In July 2019, the RBI blamed the poor credit-appraisal system of banks for rising bad debts. The biggest bad loans (12.39 per cent) were in the smallest loan category (under ₹50,000).
- The scheme emphasised more on cash flow-based lending and not security-based lending. Collateral securities were avoided, and repayment obligations were kept flexible.
- The staff at branches focused more on meeting the target. Once the loan is given, there is virtually no effective mechanism that can be employed to get the repayment. Banks have recovery agents and business correspondents, but often they are local people and the borrowers don’t take them seriously.
Government should consider burying the scheme. More recent policies (renewable energy, production-linked incentives, timely tariff protection against dumping) where the government isn’t giving any direct loan and only helping the private sector, would generate much more economic growth and employment.
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