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Of MUDRA Yojna & Businesses

How to lie with statistics
Srinagar | Posted : Jul 18 2017 1:33AM | Updated: Jul 17 2017 11:41PM
Of MUDRA Yojna & Businesses
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In response to a question, posed by a host on a private news channel, regarding the grim situation of unemployment in India, Amitabh Kant (CEO NITI Ayog) bragged about the impressive role played by Pradhan Mantri Mudra Yojna (PMMY) in financially empowering over 7.5 Crore small business entities in India. This renewed liquidity in small businesses, as per him, has in turn helped the economy in creating jobs and soaking unemployment pressure. Notwithstanding his claims, the unemployment numbers in India paint a very contradicting picture with the number of jobs following a drastic downturn from 9.30 lakh jobs created in 2011 to a meagre 1.35 lakh jobs created in 2015. The demand on the other hand requires creation of over 60 Lakh jobs every year. Given this huge mismatch between demand and supply of jobs, which seems to have gone out of control, one can very well imagine the number of people living in serious unemployment distress in India. The claims made by the chief of the NITI Ayog and the actual employment situation on ground raises some serious questions on the data pertaining to this much cherished MUDRA scheme.  

As an antecedent to the launch of the PMMY, MUDRA Ltd (Micro Units Development and Refinance Agency) was announced as a corporate subsidiary of SIDBI by the Union Finance Minister in his FY 2015-16 budget speech and subsequently PMMY was launched by Indian Prime Minister on April 8, 2015. Since then the scheme has been ferociously marketed by the Union Government as an answer to the rising pangs of financial starvation in lower strata of the business sector and its importance in absorbing the migration of agrarian workers towards nonfarm sector.

As far as the achievements under the scheme are concerned, against a target of Rs 1.22 lakh crore in its first year of launch (FY 2015-16), the scheme managed to deploy an astounding amount of Rs 1.33 lakh crore. In FY 2016-17, achievements under the scheme again surpassed the target of Rs 1.8 Lakh crore. And for FY 2017-18 GoI has set an ambitious target of Rs 2.44 crore. One fails to understand that if so much of money is flowing through Non-Banking Financial Corporations (NBFCs), Micro Finance Institutes (MFIs) and banks through this scheme into the system, why is it not culminating into job creation? In order to answer that, it is important that we dig a bit deeper into the anatomy of this much-celebrated scheme.

First, MUDRA is not a full-fledged financial product. Most of the information available on official MUDRA sources embarks more about the objective, roles and responsibilities behind setting up of MUDRA Ltd. Unlike conventional banking schemes which has its essential parameters like rate of interest, processing charges, documentation requirements, income criteria, repayments terms etc clearly defined, PMMY has limited its role in only defining the quantum (Shishu-up to Rs 50,000, Kishore-Rs 50,000 to Rs 5 lakh and Tarun-Rs 5 lakh to Rs 10 lakh) and broad target segment (non-farm non-corporate small business sector). For everything else it says that the usual terms and conditions of the lending agency may have to be followed for availing of loans under PMMY.

This last line is with what the lending entities have boldly played with. Given the freedom to define all the other parameters, PMMY’s role was limited to an open ended box which lending entities happily filled with plethora of existing products that they already have in their legacy portfolios. Eventually, lending reported by the lenders under the MUDRA scheme is just a reclassification of loans that were already being given by individual banks and non-banks in the ticket-sizes classified as Sishu, Kishore and Tarun. Lenders went on mocking the targets with simple recalibration of their asset portfolios; the monitoring agency on the other hand used these stats in boasting achievements. Everybody was happy expect the enterprises who expected collateral free flow of credit at a low rate of interest with limited hassles.  

Second, MUDRA by definition is a refinancing agency. Like other refinancing institutes (Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB), National Bank for Agriculture and Rural Development (NABARD) etc), MUDRA Ltd cannot lend directly to borrowers unless and until it is given a bank status. It in turn lends to NBFCs, MFIs and Banks at a cheaper rate of interest but only for specific purpose of lending to eligible borrowers defined by the refinancing agency. In case of MUDRA, the refinancing funding is provided only to those banks that are willing to lend to this segment at base rate (MCLR after 1st April 2016). Given the high probability of default in the target segment defined by MUDRA, lenders typically avoid lending on MCLR and ideally keep a risk premium which makes these lenders ineligible to receive refinancing from MUDRA for PMMY. As a result in first year of its implementation, 22 banks refinanced only Rs 3300 crore worth of loans under the MUDRA scheme compared to Rs. 1.33 Lakh Crore disbursed which is less than 2.5%. Lenders instead opted for a much safer and less cumbersome route which is reporting the existing banking book painted in MUDRA colors.

The strategic intent defined by the vision and mission of MUDRA is without a doubt a very significant areas of economy which has remained poorly addressed as on date. If credit is pushed effectively into these channels, it has the potential to create a long lasting undercurrent of sustained economic growth. The scheme, however, has ironically been limited to filling numbers and boasting achievements. The real objective is getting absolutely defeated which is clearly reflected in the dismal condition of the job markets, contracting lower strata non-farm economy and overall credit contraction in the economy.