Mudra Scheme: A quick dipstick assessment of its performance and sustainability

Mudra Scheme: A Quick Dipstick Assessment of Performance and Sustainability

Livelihood creation and uplifting the economically weaker segments have been the key priority areas for our government for over a decade now. A pragmatic and structured approach has been deployed which includes initiatives such as skill development programs, livelihood creation schemes coupled with financial support for promoting mass entrepreneurship and growth of micro enterprises. One such scheme - The Pradhan Mantri Mudra Yojana (#PMMY), launched in 2015 continues to be a cornerstone of India's drive towards financial inclusion and the empowerment of small-scale entrepreneurs. To recap, PMMY provides collateral-free micro-credit up to ?10 lakh to non-corporate, non-farm small and micro-entrepreneurs for income-generating activities under three categories, tailored to suit different stages of business growth namely, Shishu (up to ?50,000), Kishor (?50,000 to ?5 lakh) and Tarun (?5 lakh to ?10 - ?20 lakh). The scheme's success is evident, with over 48 crore loans sanctioned, amounting to more than ?28 trillion in disbursements by March 2024. In FY24 alone, ?5.32 trillion was disbursed, reflecting a robust CAGR of approximately 16% since FY16. The key question now is whether this growth rate can be sustained in the years to come.

Let's delve deeper into the scheme’s performance and its interplay with relevant budget announcements for 2024, which include an enhanced limit under the Mudra scheme, the development of an in-house credit assessment model for public sector banks, and a focus on digitization.

Tremendous growth thus far:

Since its launch, the PMMY has seen huge traction with all the MLIs (Member Lending Institutions), meeting and some even exceeding their targets year on year. Public sector banks have traditionally been the largest contributors, leveraging their extensive branch networks and reach. However, #NBFCs and #MFIs have also played a vital role, especially in reaching the underserved and remote areas with a focused approach.

While the scheme witnessed a subdued participation from the private sector (NBFCs in particular in the initial years) possibly owing to lack of digitisation and procedural burden coupled with lack of incentivisation, the same has improved slightly over the last 3-4 years. In FY24, banks contributed 79% of the total disbursements under Mudra scheme, followed by MFIs at 14% and NBFCs at 7%.

The adoption of Mudra scheme has been further enabled by the Credit Guarantee Fund for Micro Units (CGFMU), the Trust Fund set up by GOI with the purpose of guaranteeing payment against default in Micro Loans extended under the PMMY Scheme by the MLIs. CGFMU provides second guarantee beyond first 3% of the amount of default to the extent of 75% on a pro-rata basis.

Over the years, the Mudra scheme has made significant strides in addressing its initial challenges such as standardisation and streamlining of processes related to loan application and disbursement, ensuring faster processing, quicker TATs, enhanced compliance and better monitoring. While key performance metrics appear strong, it will be essential to closely monitor the Mudra scheme's growth and asset quality moving forward. The following considerations are critical from this vantage point:

Asset growth sustenance:

We have seen Mudra targets consistently being outperformed year after year. Some would argue this rapid growth may be due to the classification and reclassification of existing loans / accounts, such as micro individual loans, self-help groups (SHG), joint liability group (JLG), and even secured loans under the Mudra umbrella. This can be attributed to the scheme’s basic loan eligibility criteria, which primarily focus on the loan amount sanctioned. Moreover, insufficient data on unique and new accounts under PMMY as well as loans to new-to-credit (NTC) customers, etc. adds to the ambiguity regarding the extent of financial inclusion the scheme has really brought about.

Another crucial factor for the sustained growth of PMMY scheme is higher participation of MFI and base & mid layer NBFCs which have the potential to drive deeper penetration of the scheme. However, these small and medium sized micro lenders face challenges in securing bank financing, even as the sector grew by 25% in FY24. Further, the refinance scheme under the Mudra Bank also saw an extremely subdued sanctions to NBFC and MFI segments at ?675 crore and ?973 crore respectively in FY23. To address this, relaxing credit rating requirements for NBFCs and MFIs seeking bank loans, along with increasing the Mudra Bank's refinance budget, could be pivotal steps forward

Asset Quality improvement through better end-use monitoring:

Government initiatives have significantly increased awareness and accessibility of PMMY loans, particularly in rural and semi-urban areas. Financial literacy programs and business correspondence services have been introduced to help borrowers manage their businesses more effectively. The scheme, however, continues to grapple with high loan impairments. According to various data sources, the Portfolio at Risk (PAR) for Mudra loans, especially in the Tarun category, is significantly higher than the average PAR for MFIs which itself is highest in the industry.

In the Union Budget 2024, the government increased the credit limit under the Tarun category from ?10 lakh to ?20 lakh for those who have successfully repaid previous loans. This could easily translate into additional disbursements of upto ?70-80 thousand crore over the next year itself. While the eligibility criteria for the enhanced limit, strategically filters out non-performing and wilful defaulters, there is a risk of over-funding certain borrowers, potentially pushing them into a debt trap. Another key focus area announced in the budget is the development of an integrated, tech-savvy tool by PSBs to assess the actual credit needs of MSMEs in-house. This progressive step could help mitigate the risk of over-leveraging.

Factors such as economic vulnerabilities, insufficient financial literacy leading to over-leveraging, and inefficient use of funds are challenges specific to this segment. However, the lack of curated and focused credit underwriting methodologies, over-reliance on data from external sources like credit bureaus, and, most importantly, inadequate efforts in tracking loan utilization or end-use monitoring are major contributors to high NPA levels.

Tracking loan utilization or end-use monitoring ensures that funds are used for their intended purposes, safeguarding asset quality and can potentially support credit growth without impacting the asset quality. End use tracking is therefore critical, be it for micro loans, public distribution systems, subsidies, or any other situation wherein funds are allocated / transferred for an intended purpose.

Lending institutions and fintech companies have traditionally focused on digitizing loan sourcing and credit underwriting. However, only recently has attention shifted towards tracking loan utilization and improving collection processes. Despite this progress, these areas remain under-addressed, offering substantial opportunities for innovation and technological disruption. The introduction of micro credit/debit cards like the micro RuPay Card, which allows borrowers to make transactions directly from the sanctioned loan amount, is one way MLIs are tracking end-use. Every transaction is recorded, providing lenders with real-time insights into fund usage. However, the advent of Central Bank Digital Currency (CBDC) could bring the technological breakthrough needed in loan management.

There is less doubt that CBDC is going to be the next big revolution in the payment space after UPI. The potential of easy integration of digital wallets and mobile banking applications with CBDC, traceability of transactions, options for offline mode of payment can aid inter-alia more efficient, disbursal, tracking and collection of loans. It would be worthwhile for lending institutions to explore potential investments in early innovators in the CBDC application space to benefit from the early mover’s advantage both for captive consumption and sectoral disruption.

To truly achieve the objectives of the PMMY—extending financial support to the unbanked and underbanked—lending institutions must focus on credit growth while maintaining healthy asset quality. Improving loan monitoring and collection processes is just as crucial as having a robust credit underwriting process. Additionally, refining the product itself could help differentiate Mudra loans and encourage MLIs to penetrate deeper into #unbanked areas across #Bharat.

The PMMY has been a transformative initiative in promoting financial inclusion and mass entrepreneurship in India thus far and it would be interesting to track its journey ahead. For millions of aspiring entrepreneurs, PMMY continues to be a beacon of hope, empowering them to realize their business dreams., empowering millions of aspiring entrepreneurs to realize their business dreams.