Banks that are extending uncollateralized loans under the Pradhan Mantri Mudra Yojana (PMMY) must also closely monitor the repayment of such loans so as to prevent them from turning sour, a senior official from the central bank said on November 26.
"While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of non-performing assets (NPAs) among these borrowers. Banks need to focus on repayment capacity at the appraisal stage and monitor the loans through the life cycle much more closely," MK Jain, Deputy Governor, Reserve Bank of India (RBI) said, referring to loans given under the Mudra scheme.
The PMMY was launched in April 2015 for providing loans up to Rs 10 lakh to the non-corporate, non-farm small/micro enterprises without any collateral. Data showed that Rs 7.28 lakh crore loans have been disbursed to 3.27 crore marginal and small entrepreneurs, including SCs and STs, under the scheme in the last three financial years.
Jain also pointed to the systemic and concentration risks that could emerge in the microfinance sector in India.
"Systemic risk may arise out from unsustainable credit growth, increased interconnectedness and financial risk manifested by lower profitability," Jain said, adding that the industry also needs to address data confidentiality and consumer protection.
Typically, microfinance institutions that lend at grassroot level, tend to limit their operations geographically and focus at certain areas only, which leads to concentration risks.
Jain said that microfinance institutions must broaden their client outreach to reduce the concentration risk in their own interest and to serve a wider clientele base. "From a financial inclusion perspective they should also critically review their operations so other regions don't remain underserved," Jain said.
He added that the role of microfinance is growing in the country. Also, leading e-commerce companies have tied up with banks and non-banks to extend working capital loans to micro and small businesses.
Jain said that the introduction of GST has played a role in bringing the informal economy under the fold of financial services. This may also lead to reduction in their cost of funds going ahead.
"As a result of much improved digital footprint, micro and small enterprises have become attractive cleints for banks and NBFCs and MFIs, thereby reducing their dependence on informal source of funds. The cost of credit for the micro and small enterprises will also decrease meaningfully as lending will shift from collateral based lending to cash flow based lending," Jain said.
In it's report submitted in June, the expert committee on Micro, Small and Medium enterprises set up by the RBI said that there was a need for reimagining of MUDRA.
"The committee observed that MUDRA would require enhancement of in-house (or outsourced) capabilities, including underwriting, risk management, fund raising based on its own AAA rating and sharper focus on emerging trends in the market," the report said