Banks To Review Mudra Loan Book

Banks To Review Mudra Loan Book - Background Context

The Ministry of Finance has demanded banks check and review the loans approved/disbursed under the Pradhan Mantri Mudra Yojana (PMMY) Scheme, more popularly known as Mudra Loan Scheme.

These Non-Performing Assets (NPA) have reached the figure of ₹11k crores (i.e.₹110000000000) in the first three years of the launch of the scheme. The ever-increasing arrears under Mudra Loan Scheme are a number of concerns.

It is already more than 36 months and needs to scrutinize the banks' process of loan approval. The RBI already put its concern ahead of the Lok Sabha elections about bad loans to the government.

What might have gone wrong?

  • The PMMY scheme is one of its kind to support startups and provide a financial boost to Micro, Small, and Medium enterprises. The Banks were busy in achieving loans disbursal Targets.
  • The pressure environment of meeting the targets had to relax the verification process and focus on Mudra Loan approval and disbursement.
  • Hence in many occurrences, the respective banks did not perform well in the verification and validation of the loan-seeker, thus now making it difficult for the banks to retrieve the loan amount from defaulters.

Brief about the Pradhan Mantri MUDRA Yojana (PMMY)

The PMMY scheme was initiated in April 2015. The scheme’s preliminary objective is Restructure collateral-free loans provided by the lenders to micro to small borrowers or loan-seekers.

  • The scheme is beefed up with ₹20,000 crores at its disposal and it may lend small amounts between ₹50,000 and ₹10 lakhs to micro, small, and medium enterprises/entrepreneurs.
  • Designated banks and Microfinance Institutions (MFI’s) are enabled to draw funds under the MUDRA scheme, once they become registered member lending-institution of the MUDRA yojana.
  • Mudra Yojana is especially for activities other than agriculture, these non-agricultural activities may get loan approval up to ₹10 lakhs. Activities such as Bee Keeping, Dairy, and Poultry Farms are also considered under the PMMY Scheme or Mudra Yojana.
  • This scheme has unique features that issue Mudra-Card which allows withdrawal of necessary working capital from ATM machines.

Types of Loan Under PMMY

  1. Shishu (loan up to ₹50,000).
  2. Kishore (starting from ₹50,001 to ₹5,00,000).
  3. Tarun (starting from ₹500,001 to ₹10,00,000)

Purpose/Goal of the Scheme

Fund the Unfunded

Individuals who are into business or have a business plan to generate income from non-farm activities such as manufacturing, processing, packaging, trading (except financial), or services delivery model based business, but lack access to funds or have low funds or have no funds can ask for loans up to ₹10 lakhs under MUDRA Yojana.

Micro finance institutions (MFI) Monitoring and Regulation

In association with MUDRA banks, the network or series of microfinance establishments will be under continuous monitoring, they shall also be responsible for new registration and inward application.

Promote Financial Inclusion

Financial inclusion with the objective to access last-mile credit delivery to micro businesses in remote places, can be achieved with the help of technology and services.

Reduce Jobless Economic Growth

Seeing economic growth is the ultimate resolution and agenda of any nation on earth, but Jobless economic growth is pure evil in long run. MUDRA yojana is aimed to provide sustainable financial solutions to small entrepreneurs in order to generate employment as well as self-employment, and collectively increase GDP.

Integration of Informal Economy into Formal Sector

It would assist India in its tax base growth as incomes from the informal sector (eg. temporary & casual jobs, unpaid jobs or jobs for work experience, subsistence farming, multiple jobs holding for livelihood, and mere survival) are non-taxed.