Bad loans in Mudra scheme double as Covid19 hits MSMEs

The Mudra scheme is a part of the government’s direct-lending programme, under which banks are pushed to lend.

Hit by a slowing economy and two pandemic waves, bad loans of the micro, small and medium enterprises (MSMEs) under the Pradhan Mantri Mudra Yojna (PMMY) have doubled since 2018-19 or FY19.

FY19 was the last pre-pandemic fiscal.

The NPAs of small businesses against loans taken under PMMY, better known as the Mudra scheme, stood at Rs 34,090.34 crore in FY21, against Rs 17,712.63 crore in FY19. Data shared by Minister of State for Finance Bhagwat Karad, in response to a question in Parliament, show that NPAs under the scheme jumped more than 47 percent to Rs 26,078.43 crore in FY20 and then another 31 per cent during the pandemic year. 

The Mudra scheme was launched in April 2015 to help micro entrepreneurs access credit from the formal financial system.

Though the rise in NPAs over the period seems significant, none of the market observers Moneycontrol spoke to expressed surprise. 

Sanjay Agarwal, senior director, CareEdge Ratings, said that growth in the bad loans under the Mudra scheme was expected. He said the pandemic-related lockdowns and demand disruptions had affected the repayment capacity of even the medium and small borrowers. Anyway, he added, some of the bad loans had accumulated over the previous years.

"Even before COVID19, the gross bad loans of the public sector banks on account of MSMEs used to be in the 15-16 percent range," said Karan Gupta, director, financial institutions, India Ratings and Research. Add to this the beating the enterprises have taken on account of the pandemic and the rise of the NPAs in the Mudra loans is not a big surprise, he said.

Gupta explained that the increase in bad loans under the scheme was expected as the Mudra scheme is a part of the government’s direct-lending programme, under which banks are pushed to lend. As of December 17, non-banking financial companies (NBFCs), small finance banks and public and private lenders had disbursed Rs 1.58 lakh crore out of the Rs. 1.64 lakh crore sanctioned.

Essential lifeline

R Ramamurthy, member, All India Council of Association of MSMEs (AICA) said the lending under the Mudra scheme should not be curtailed just because of the rise in bad loans. “The pandemic has played a role in the spike in the number of bad loans. The disbursal rate under the Mudra scheme was encouraging and must be continued irrespective of the NPA level,” he said.

Mudra loans are extended under three categories. Smallest loans, of up to Rs 50,000, are offered under the Shishu category. Loans of more than Rs 50,000 but less than Rs 5 lakh are given under the Kishore category, while larger loans of Rs 5-10 lakhs are given under the Tarun category.

MoS Finance also informed the Parliament that since the inception of the scheme, so far 27.87 crore Shishu loans have been granted followed by 3.61 crore Kishore loans and 62.89 lakh Tarun loans under Mudra. 

The Minister also informed that the three categories of Mudra loans are eligible for Central Bank’s Covid19 Regulatory Package. The package permits all lending institutions to grant a moratorium of six months on payment of all installments falling due between March 1, 2020, and August 31, 2020. 

Earlier in October this year, a report of the ratings agency Crisil had warned that, despite benefiting from the emergency credit line guarantee scheme, the MSME segment was likely to see its asset quality deteriorate and will require restructuring to manage cash-flow. It had said that stressed assets in the MSME segment was expected to be 17-18 percent of the loan book by the end of the current fiscal (FY22).