Finance Minister Nirmala Sitharaman (File image: Reuters)
As part of the Rs 20 lakh crore COVID-19 economic package, Union Finance Minister Nirmala Sitharaman announced a scheme that offers Rs 5, 000 crore worth loans to street vendors. According to the government, street vendors will get Rs 10,000 initial working capital from banks.
“Around 50 lakh street vendors will be able to avail Rs 10,000 loan from Rs 5,000 crore special credit facility; once the lockdown is lifted they can start their business back," Sitharaman added. According to bankers, PSU banks will soon get targets to disburse these loans once the government frames the detailed rules. This will logically put pressure on bankers to meet the targets set for each bank.
There are three reasons why these loans may backfire on the banking sector and could end up as non-performing assets (NPAs) on their books.
One, commercial banks do not typically deal with such low-ticket loans (Rs 10,000). Also, they do not have the expertise to assess the creditworthiness of this segment of borrowers since there is no credit history available for street vendors. For this reason, street vendors typically borrow from microlenders or local moneylenders. “It is impossible for banks to conduct the due diligence of such borrowers. Only field officers of microlenders who know the background of such borrowers and are familiar with the area can ensure that this money is coming back,” said Kishor Kumar Puli, managing director and CEO of Pradakshina Fintech, an NBFC based in Hyderabad that operates among small borrowers as a corporate business correspondent.
Two, bankers fear the indulgence of political middlemen in street vendor loans. If indeed this happens, there are possibilities of major misappropriation and misuse of this Rs 5000 crore scheme. According to bankers, this happens rampantly in Mudra loan scheme. “There have been complaints from across the country about local politicians approaching bank officials to give loans under Mudra scheme to their people. Typically, these politicians pocket a part of the loan as commission. In fact, this is true for any government schemes,” said CH Venkatachalam, General Secretary, All India Bank Employees Association. According to Venkatachalam, already bank officials have started getting calls from local politicians seeking the availability of loans under schemes announced by FM Sitharaman last week.
Three, much of these loans will likely go for consumption purpose, rather than investing in business as working capital. This will make repayments difficult. Street vendors have been out of work for over 50 days due to the nationwide lockdown. “This money will be used to repay their old borrowings and other necessary expenditure. This essentially means that banks are not getting their money back. This will likely end up as loan mela,” said another banker who didn’t want to be named. Basically, these loans are highly likely to turn to NPAs in the books of banks.
What can the government do?
Instead of giving loans, the government should have done direct cash transfers to street vendors and other economically weaker sections in rural India as one-time assistance. This would have been a real demand stimulus for this segment of the population who have been hit hard by the lockdown. Also, such an approach would have spared PSU banks from the burden of giving risky loans.
Sa-Dhan, an industry lobby of microfinance companies, has written to the government pitching that MFIs are better positioned than banks to do street vendor loans. “We have asked the government to give us financial support to do these loans. MFIs know this market and have the expertise to transact with this segment of borrowers. According to Sa-Dhan, 45 percent of the borrowers of MFIs are from urban and semi-urban areas. Of this, 31 percent are street vendors, the letter written by the body says.