RBI raises red flags on Mudra’s bad debts


Bombay: Reserve Bank Deputy Governor MK Jain on Tuesday warned bankers of the growing stress over Mudra loans, which topped more than ??3.21 lakh crore system-wide, and asked them to closely monitor these loans, as unsustainable credit growth in the industry can put the system at risk.

Prime Minister Narendra Modi launched the Mudra program in April 2015 with great fanfare to provide faster credit up to ??10 lakh to small businesses that are not businesses, non-farm small / micro businesses that normally do not get bank funds due to their bad credit rating and especially their absence. These loans are granted by banks, NBFCs, RRBs, cooperative banks and small financing banks.

Interestingly, less than a year after the start of the program, then Reserve Bank governor Raghuram Rajan warned of asset quality issues in the program, but the minister then Finance Minister Arun Jaitely dismissed the concerns.

“The Mudra loans are one example. While such a massive surge would have lifted many beneficiaries out of poverty, the growing level of non-performing assets among these borrowers has raised concerns,” Jain said at the meeting. ‘a Sidbi event on microfinance.

The commercial banker-turned-central banker said banks need to focus on repayment capacity at the appraisal stage itself and more closely monitor loans throughout the account lifecycle.

The government informed parliament in July that the total NPA for the Mudra program was over ??3.21 lakh crore jumped to 2.68 percent in FY19, from 2.52 percent in FY18. Since the inception of the program, more than 19 crore in loans have been extended. under the program until June 2019, the government informed. Of the total 3.63 crore accounts are in default as of March 2019.

However, according to a response from RTI, bad debts from the Mudra program climbed 126% in FY19, jumping from ??9,204.14 crore to ??16,481.45 crore in FY19 from ??7,277.31 crores in FY8.

Jain said “Systemic risk can arise from unsustainable credit growth, increased interconnection, pro-cyclical and financial risks manifested in lower profitability.”

It is interesting to see leading e-commerce companies partnering with banks and NBFCs to offer working capital loans to their suppliers, who are mostly micro and small businesses, on competitive terms, did he declare.

Stating that the GST has significantly affected the informal economy, he said that “due to the improved digital footprint, MSMEs have become attractive clients for banks, NBFCs and MFIs, thus reducing their dependence on informal sources of finance ”.

The cost of credit for MSMEs will also decrease significantly, as loans shift from loans based on guarantees to loans based on cash flow, he said.

Noting that technology carries its own share of risks and challenges for regulators and supervisors in the financial sector, he said, “recognizing these risks early and taking steps to mitigate regulatory and supervisory challenges related issues are essential to fully exploit the potential of these developments ”.

The MFI sector needs to focus on digital finance, he said, adding that data privacy and consumer protection are major areas that need to be addressed by them as well.

“With the need to increase transparency, resolve client-centric issues, and protect the interests of low-income clients in mind, microfinance lenders must put their clients’ best interests first and foremost. implement the responsible lending code, ”he said.

MFIs also need to expand their client base in order to reduce the risk of concentration in their own interest and to serve a larger client base. From a financial inclusion perspective, MFIs should critically review their operations so that other regions do not remain underserved, he said.

Addressing the event, Sidbi President Mohammad Mustafa said the microfinance sector plays a key role in providing credit to low-income households, helping them in their economic development and empowerment. overall.

This story was posted from an agency feed with no text editing. Only the title has been changed.

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