COVID-19 relief package: Mudra-Shishu loan interest subvention scheme brings cheer to microfinance borrowers

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The two percent interest subvention scheme announced by Union Finance Minister Nirmala Sitharaman on Thursday for loans given under the Mudra-Shishu scheme will mainly benefit borrowers of microfinance institutions (MFIs), according to an industry official.

Shishu loans are loans up to Rs 50,000. Announcing the scheme, Sitharaman said the interest subvention scheme will be worth a total of Rs 1,500 crore and about three crore people will benefit from this. Sitharaman said this as part of the second tranche announcements of the government’s Rs 20 lakh crore COVID-19 economic package.

According to P Satish, executive director of Sa-Dhan, an industry lobby of microlenders, about half of the Mudra-Shishu loans are given through MFIs. Only a small portion is given through banks.

“As per the latest data available, 45-50 percent of Shishu loans are through MFIs. Borrowers are likely to get benefit of interest subvention amount directly in their bank accounts as per the subvention scheme but details are yet to be finalised,”said Satish.

If one includes the microfinance loans through non-banking finance companies (NBFCs) and small finance banks, this ratio goes up to about 65 percent.

As on March, 2019, total Shishu loans outstanding is Rs 1,39,965 crore, of which MFI loans account Rs 63,470.97 crore. Data collection for 2020 is still going on as annual closing is disrupted. For this reason, March 2020 numbers aren’t available yet.

Besides, the Rs 5,000 crore credit facility announced to benefit 50 lakh street vendors will also include a significant chunk of MFI loans, Satish said. About 45 percent of the MFI borrowers are in urban areas of which 31 percent are various types of street vendors.

This is significant since MFI borrowers are mainly low-income groups such as daily wage earners or small vendors. During the lockdown, this segment had suffered major income loss, according to industry officials.

On May 12, Prime Minister Narendra Modi announced a major economic stimulus package worth Rs 20 lakh crore to help the economy recover from the stimulus. Of this, Rs 7 lakh-Rs 8 lakh  crore are liquidity measures already announced by the Reserve Bank of India and Rs 1.7 lakh crore is the welfare measures announced by the government in March.

PSBs to be under pressure

So far, much of the economic package announced is through credit facilities and interest subvention schemes to various classes of customers. In her first press meet on May 13, Sitharaman said banks will disburse Rs 3 lakh crore worth collateral-free loans to micro, small and medium enterprises (MSMEs) backed by government guarantee. These loans will have one-year moratorium and a four-year repayment period. Also, Rs 75, 000 crore lending has been earmarked for NBFCs and MFIs.

On May 14, Sitharaman continued with loan schemes. She announced Rs 2 lakh crore concessional credit for 2.5 crore farmers through new Kisan Credit Card route, Rs 30,000 crore emergency working capital fund through NABARD, 2 percent interest subvention on Mudra loans less than Rs 50,000 and Rs 5,000 crore credit facility for street vendors. Logically, PSBs will be under tremendous pressure from now on. They will be asked to kickstart the disbursement of loans to meet the targets set by the government.

Including these, and what Sitharaman has announced in the last two days, majority of the package is already announced. The remaining will be announced in following tranches.