When the Pradhan Mantri MUDRA Yojana (PMMY) was announced in April 2015, there were several cynics. No less than a former Finance Minister questioned the programme on grounds of it being inadequate to lead to any job creation.
It was seen as a diversion of savings, which would have otherwise either financed public expenditures or private sector borrowings. Notwithstanding the consideration of optimal allocation of capital (remember, private sector banks on an average are more efficient in India at it than public sector banks), much of the criticism was towards the scheme ultimately leading to massive non-performing assets triggering a problem similar to the twin balance sheet problem in 2013.
Many bought into these arguments, and dismissed the programme as just another redistributive scheme — only, in this case of bank credit (i.e., liabilities) rather than assets. They expected massive non-performing assets requiring the government to bail the banks out. Fast forward seven years, and the scheme continues to have low NPAs at just 3.3 percent!
In many ways, the PMMY, which is commonly referred to as the Mudra scheme, was perhaps somewhere at the back of the mind of policymakers while preparing the pandemic fiscal response package as credit guarantees for MSMEs formed a major part of the package. Mudra too was largely a credit guarantee given by the government on behalf of the borrower.
There are two issues here that make Mudra important, and also outline the different approaches towards governance. Finance Minister P Chidambaram, while being critical of the scheme, might have assumed that it will be misused, and banks will be defrauded. Not surprising, considering the influence of North Block in guiding banks’ lending decisions in the past. Clearly, he was aware of how the system could be defrauded. The point here is of lack of trust – in banks, and more importantly, in India’s poor and marginalised.
The approach behind Mudra is the exact opposite. This approach is based on trust that the borrowers would be financially prudent despite the government giving a guarantee to the banks. In theory, there was enormous potential for moral hazard. However, one of the reason why it did not happen pertains to the fact that these loans were small in their token size, and were given to extremely poor, vulnerable, and small business owners.
For instance, several rickshaw-walas availed these loans to purchase their autos rather than pay a monthly rent. Some of them even bought extra rickshaws and encouraged migrant labourers to use their rickshaws only for a few months, and eventually get their own vehicles using the Mudra loans.
Microfinance tends to have an impact on the financial health of people that is difficult to quantify even when aggregated to get an estimate of the macroeconomic effects. However, one need not go far but just watch the countless testimonials on MyGov, Government of India’s website to see how the scheme has transformed countless lives over the last seven years of its operation.
There are numerous studies that would have indicated that micro-borrowers typically have greater financial discipline, and are often more scared to default. This is mostly because of the inherent fear of not being able to rely on formal sources of capital in the event of a rainy day due to bad credit history. Scarcity often teaches a lot of financial management than what countless years of constrained optimisation would teach me, or my peers.
But it was not just Mudra that was criticised heavily by former policymakers. Another scheme that was criticised was the Jan Dhan Yojana — by reminding that these were zero balance accounts. Today, there is no talk about the zero balance. More importantly, it is worth asking if India’s social security architecture could have survived the pandemic and its resultant economic shock in the absence of the Jan Dhan accounts, or the JAM trinity.
The social security architecture without the JAM trinity seems inconceivable today, but this did not exist always. Sadly, even this architecture was criticised along the way — including, more recently the criticism on digital payments. Smallest of vendors using QR code-based payment systems that are much advanced than anywhere else in the world is the best response to such ill-founded criticism.
But what is the source of this criticism? Part of it is the old habit of mistrusting people. But this ignores the fact that no system is such that it cannot be misused. Every system can and has been misused in India. The question is, can we reduce this misuse, and can we move from a level of high mistrust to a society built on greater trust? It is the latter which has formed the guiding idea behind some of the changes on the ease of living front, even as many other reforms remain.
There can be different viewpoints on the Mudra scheme — from a growth, from a capital deployment, or even from a development perspective. However, the scheme has undoubtedly transformed the lives of countless small business owners. Equally, we must now accept that the criticism of the scheme on account of limited impact on small businesses or concerns on their ability to repay have been ill-founded.
Karan Bhasin is a New Delhi-based economist. Twitter: @karanbhasin95. Views are personal, and do not represent the stand of this publication.
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