The Modi government may have to get battle ready soon for cleaning up the Mudra loan mess that has added to the concerns of the banking system. The plan to create “job creators and not job seekers” by disbursing massive credit to micro and small entrepreneurs under the much-trumpeted Mudra Yojana is learned to have met limited success.
A large chunk of such loan accounts is believed to have turned into bad debt as PSU banks in smaller towns and cities take stock of repayments.
What seems more troubling is that many bank executives are learned to have aided the piling of stressed assets by conniving with loanees. Sources in at least two PSU banks told FC that many branch managers had resorted to a so-called 60:40 formula under which borrowers received only 40 percent of the loan disbursed with the remaining amount going to the sanctioning authority.
The managers used a part of the 60 percent amount to repay the Mudra loan for a year and pocketed the rest. As the loans had been repaid regularly for a year, the account was saved from going into “quick mortality.” Later, when repayment stopped, the account was shown as genuine business failure thus protecting the bank executive from scrutiny or penal action with the loanee also hiding behind the “business failures.”
Quick mortality accounts are defined as bank accounts, which become NPA within one year of original sanction or first disbursement, and in case of housing loan within one year from the date of commencement of installment, whichever is later.
“The 60:40 formula is quite popular in our bank. You just need to ask any bank manager as to what percentage of borrowers of Mudra loan are repaying loans after a year,” said a middle-level officer at a PSU bank in the North East region. A senior manager at SBI in Uttarakhand agreed, saying there were a lot of deficiencies in the scheme which are now coming to the fore. “After three years, data is being available now on Mudra loans. I have seen more than half of the loan accounts, almost 60 percent, turning into NPA in our area. Since these loans were given without collateral there is very slim possibility of recovery,” he noted.
Traditionally, financial institutions have preferred to lend to larger companies that are able to provide collateral, instead of lending to MSMEs, which are often run by first-time entrepreneurs often believed to represent greater credit risk.
Alarmed at the Mudra loan worries, the chief of a leading public sector bank said, “Despite recovery of credit growth in the industry, banks may come under fear cloud with a huge amount of Mudra disbursement being aided and supported by the government.”
Sensing a bigger credit risk on the government’s Mudra loan disbursement to the tune of total Rs 6 lakh crore till date, mostly to the first-time entrepreneurs, lender communities have expressed their concern to the finance ministry. They have sought stricter procedures to prevent this segment from becoming the latest ‘poster boy’ for bad loans in the country.
Defending the banks in this issue, a senior official, however, claimed that the quick mortality rate on Mudra loans has come down drastically after strict norms issued by the RBI and the ministry of finance.
“We properly verify the loanee’s KYC in which several rounds of physical inspections are done before sanctioning any Mudra loan. Besides, the banks also verify the purpose of loan given to the beneficiaries,” the bank official said. “Apart from that, we monitor the beneficiary’s business prog-ress on regular interval of time. If the loans appear to go on quick mortality mode, the bank immediately takes cognisance of this and acts against the official who is accountable for the wrongdoing. The bank never allows the loanee to face any failure in his business. Even if it happens, the concerned branch head is liable to answer,” he added.
Recently, the anti-corruption branch of CBI registered a case against a former manager of Canara Bank for allegedly entering into a criminal conspiracy with a middleman and sanctioning and disbursing loans worth Rs 4.77 crore to micro, small and medium enterprises without following norms. The accounts were found to be without security and had slipped into non-performing assets (NPA) within a short period of time, suffering quick mortality as well.
The Mudra scheme was launched by PM Narendra Modi in April 2015 to improve access to micro-finance for non-corporate, non-farm small/micro enterprises and stimulate job creation in the country. Any individuals can apply to private or public banks for loans of up to Rs 10 lakh without having to provide collateral. PMMY scheme is mainly divided into three categories — Shishu Loans, Kishor Loans and Tarun Loans.