Issue

Context

• Finance Ministry plans to revamp its flagship lending scheme, Pradhan Mantri Mudra Yojna (PMMY), to ensure better access to credit for small firms, boost entrepreneurship and promote financial inclusion.
• Government will also take into consideration that Non-Performing Assets should not be created out of the MUDRA loans which could burden the Banking sector further.

Background

• Financial Inclusion is one of the most important strategies in India to empower citizens. The primary point behind the monetary consideration is to cover the all segment of population under monetary administrations.
• Government of India (GOI) has introduced some of the major steps to “fund the unfunded” micro enterprises segment. One of the initiatives taken by Government of India (GOI) is Pradhan Mantri Mudra Yojana (PMMY) which plays an important role in achieving the success of financial inclusion. The idea behind the scheme is to provide the credit requirement to small business upto 10 lakh.
• The Micro Units Development & Refinance Agency Ltd. (Mudra) was set up in 2015 under the Pradhan Mantri Mudra Yojana (PMMY) to help develop and refinance the ‘non-corporate business’ sector.
• It is aimed at supporting finance institutions that lend to micro/small business entities engaged in manufacturing, trading and service activities. The loan is given primarily for the purpose of employment creation at the grassroots level through formal banking credit channel.
• Under MUDRA scheme, collateral-free loan of up to ?10 lakh falls under three categories—Shishu, Kishore and Tarun. Shishu accounts for loans of up to ?50,000, while ?50,001 to ?5 lakh are disbursed under Kishore. The third category is for loans of ?5-10 lakh.
• More than 17 crore entrepreneurs have availed loans under the Pradhan Mantri Mudra Yojna so far till March 2019, which has been seen as one of the biggest interventions in MSME sector by the government in recent times.

Significance of Financial Inclusion

• Access to financial services enables the poorest and most vulnerable in society to step out of poverty and reduces the inequality in society.
• Financial inclusion not only helps individuals and families, but collectively it develops entire communities and can help drive economic growth.
• Financial inclusion is about enabling and empowering people and communities:
  • Enabling people to have the ability and tools to manage and save their money
  • Empowering people with the skills and knowledge to make the right financial decisions
• Participation within the financial system leads to all kinds of individual benefits, including:
  • Ability to start and grow a business, which gives people an opportunity through micro-financing schemes for example to better long term prospects
  • Being able to pay for an education for children, which in turn enables a new generation of educated and informed individuals
  • The ability to handle uncertainties that require ad hoc and unexpected payments or ‘financial shocks’
• Financial inclusion through access to an account, savings and a payment system (whatever that maybe) enables potential and empowers men, women and whole communities. This in turn promotes:
  • Investment within the community, provides jobs and again research shows that employment boosts status, income and ones outlook on life. Collectively this helps to invigorate economies.
  • Equality both within the community and within families.

Analysis

Funding the unfunded: Concerns

• In India the main problem that acts as a hurdle for the development of entrepreneurship is financing.
• Major problems faced by micro enterprises, small business and entrepreneurs includes financial illiteracy, lack of information, lack of financial access, entry level policies, lack of infrastructure, high cost and technologies barriers.
• Bank credit to MSMEs as a percentage of GDP in India is around 6%—less than one-sixth of the levels seen in South Korea and China, and one-fourth in Thailand and Malaysia.
• As per the International Finance Corporation, the total financing demand of Indian MSME sector is Rs 32.5 lakh crore, but availability of funds, both internal and formal finance, is Rs 14.6 lakh crore. So, MSMEs are grappling with a formal credit gap of Rs 17.9 lakh crore, i.e. 56% of total demand.
• Banks hesitate to grant loans due to lack of transparency, lack of financial discipline, high administrative costs of small-scale lending, high-risk perception, and lack of collateral.
• High mortality rates of MSMEs—financial institutions are doubtful about their survival and growth and, therefore, under-financing happens
• 62% of 5.77 crore small business units and micro units are held by the Scheduled Cast, Scheduled Tribe and Other Backward Class as per the government estimates. These are involved in small manufacturing, trading or service businesses. For these weaker sections and low income groups, it is difficult to approach financial services and credits easily.

Why MSMEs matter?

• India’s Micro Small and Medium Enterprises (MSMEs) are vital for the economy as they contribute around 8 per cent to the GDP and being labor- intensive these employ the largest number of people in the industrial and services sectors.
• There are 50 million or so MSMEs, both registered and unregistered, in India and they contribute 6.11 percent of the manufacturing GDP and 24.6 per cent of the services GDP.
• There are 12 crore employees in MSMEs second only to agriculture. These also employ the maximum number of women workers.
• Many of the micro and small-scale units come under the informal sector due to their size and low capital base.

Performance of the MUDRA Loans

• MUDRA was introduced by keeping financial inclusion at the core of the scheme. The scheme aimed at prioritizing marginalized sections of the society such as women, STs and SCs.
• Out of the 12 crore beneficiaries, 28 per cent or 3.25 crore are first-time entrepreneurs. About 74 per cent or 9 crore, borrowers are women and 55 per cent belong to the SC/ST and OBC category.
• While women remained the biggest beneficiary in terms of loan disbursement, the disbursement to STs and SCs remained low. The general category entrepreneurs across the States dominate the loan chart, receiving 45 per cent of loans followed by Other Backward Castes (23 per cent), Schedule Caste (18 per cent) and Scheduled Tribes (5 per cent).
• The growth of entrepreneurship in the non–corporate small business sector (NCSB) in smaller States has not received any major boost under the scheme. Data shows that States that already have higher Credit–Deposit (C-D) ratios are the ones reaping the benefit of the scheme.
• While six large States led by Tamil Nadu have received over 50 per cent of the ?6.82-lakh crore MUDRA loans disbursed, a majority of North-East States and Union Territories have not received even 1 per cent of the total MUDRA loans. About 60 per cent of the total loan sanction comes from these top six States.

Major concerns

• Seeking collateral security from the beneficiaries is not mandatory under Mudra Yojana. It is argued that waiving off mandatory collateral clause may be good politics but bad economics.
• The average of sanctioned loans under Mudra Yojana comes at Rs 52,739. This amount could not be considered enough to launch a startup that could provide jobs to others.
• This amount is also much lower than the average per capita income of Indians - Rs 1.11 lakh for 2017-18, according to advance estimates of the Central Statistics Organisation (CSO).
• There is no empirical data no record for employment generated by the loans disbursed under Mudra Yojana. The numbers of large-sized loans or disbursements from the banks exceeding Rs 5 lakh - that can generate employment - are mere 1.3 per cent under Mudra Yojana.
• The Mudra scheme is designed such as to give preference to women entrepreneurs. This has led to creation of a pool of proxies, who claim to turn entrepreneurs.
• There has been a lack of awareness about the scheme among the bank officials as well as the borrowers which has clouded the performance of the scheme.
• Although present trend of NPAs in MUDRA loans are lower compared to Formal sector lending, there are apprehensions that there would be increase of NPAs from these loans in the coming years.
• The central bank has revealed that bad loans under PMMY have risen to Rs 11,000 crore. The NPAs in this segment have spiked because most of the applicants are first-time borrowers without any credit history.

Way forward

• MUDRA should enhance the role of alternative channels such as microfinance institutions (MFIs) and other intermediary organisations in reaching out to end-users by leveraging additional funds. The small ticket size loans of less than Rs 10 lakh require a very different expertise in terms of managing the loans as well as making it a success.
• Similarly, the RBI has created a new institutional infrastructure in the form of Small Finance Banks, which specialise in small ticket size loans. In fact, the entire organisation is groomed to handle and manage small borrowers. The cooperative banks are also best suited to operate in small loan segment.
• The policy makers should widen the MUDRA net and incentivize further formalization of micro units. The revamping of the scheme should allow the participation of digital lenders with small unsecured loans to new-to-credit MSMEs.
• Efforts should be made to popularise digital payments like BHIM (Bharat Interface for Money) and JAM (Jan Dhan-Aadhaar-mobile) trinity to promote cashless transactions for using the MUDRA loans.
• The new technologies and fin-techs should play a key role in devising alternative ways to do credit assessment of people who don't have a credit history. For example use various tools like driving license, social media tools, tax returns; GST should be used to assess the creditworthiness of those borrowers who borrows substantial amounts.

Learning Aid

Practice Question:

Critically analyze the success of Pradhan Mantri Mudra Scheme. How far it is right to say that it will be a new threat to financial stability of banks?