By Sreyashi Chakraborty
The importance and potential contribution of the Micro, Small, Medium and Small Enterprises Sector, or the MSME sector as it is called, are supported by both theoretical arguments and empirical evidence. It has been recognized all over the world that MSMEs are adept in distributing national income in a more efficient and equitable manner. The MSME sector stimulates economic growth by providing employment opportunities to those people who may not be employable in large-sized corporations/firms. Hence the MSME sector occupies a position of strategic significance in a labor-intensive country like India. This sector contributes nearly 8% to country’s GDP with 36 million widely dispersed enterprises across the country; accounting for 45% of manufactured output,40% of the country’s total export and produces more than 8000 value added products ranging from traditional to high-tech (Prime Minister’s Task Force on MSME, 2010).
Despite the promise shown by the industry, its growth story still faces a number of challenges. Several studies suggest that the MSME sector faces constraints like poor infrastructure, obsolete technology, inadequate market linkages etc., all of which, can ultimately traced back to inadequate access to finance. It is argued that financial institutions are hesitant to lend to MSMEs due to a lack of transparency in their financial conditions, the poor reliability of data, lack of financial discipline, high administrative costs of small-scale lending, high risk perception and lack of collateral. In a study conducted by the US-based Entrepreneurial Finance Lab (EFL), the MSME credit gap in India is estimated to be around 56%. According to the NSSO survey of 2013, there are 5.77 crore small business units, mostly individual proprietorship, which run small manufacturing, trading or services activities. Most of these ‘own account enterprises’ are owned by people belonging to Scheduled Caste, Scheduled Tribe or Other Backward Classes. Studies suggest that only 4% of such units get institutional finance even though these micro units are much more efficient than major corporate houses. The Economic Census 2014 puts the gross fixed assets of these 5.77 crore small businesses to about ₹11.5 lakh crore. But their value addition is ₹6.26 lakh crore — almost 55% of their gross fixed assets. The comparative figure for Indian corporates, according to Reserve Bank of India data, is 34%. All this despite the fact that when corporates get credit at 9 to 14%, micro units end up paying at least ten times more for it. The Economic Census 2014 also points out that while the 57.7 million micro units have provided 128 million jobs, modern corporates in the public and private sector, having absorbed over Rs. 50 lakh crore through FDI and FII investments and bank credit since 1991, added just 2.8 million jobs.
Against this backdrop, the PRADHAN MANTRI MUDRA YOJANA (PMMY) was launched by the Prime Minister on 8th April 2015. As part of the scheme, a Micro Units Development and Refinance Agency Bank (or MUDRA Bank) was set up as a subsidiary of the SIDBI whose main purpose was to provide capital to all banks seeking refinance of small business loans. With an initial capital fund of Rs. 200 billion and a credit guarantee fund of Rs. 30 billion, it aimed at ‘funding the unfunded’ and hoped to enable over 50 million entrepreneurs to access formal credit from layers of credit institutions registered under it. All this by means of MUDRA loans which are extended by banks, NBFCs, MFIs and other eligible financial intermediaries as notified by MUDRA Bank.
The MUDRA loans are extended under following three categories: Shishu (Loans up to 50,000), Tarun (Loans from 50,001 to 5 lakh) & Kishore (Loans from 5,00,001- to 10 lakh) and are given to those who want to start off fresh businesses or want loans for their existing businesses. Borrowers also aren’t charged any margins or processing fees under the Shishu category and there are minimal charges for the other categories. Accordingly, all advances granted on or after 8th April 2015 falling under the above category are classified as MUDRA loans under the PMMY and are extended to eligible borrowers without the need for any collateral securities or third-party guarantees. Banks can also seek to refinance these loans to an extent of 50%-70% depending on the individual bank’s asset portfolio and NPA ratio whereas registered MFI’s are extended micro-credit schemes amounting to Rs. 1 lakh. The refinance corpus has been raised from the priority sector lending shortfall reserves of banks.
For working capital limit, MUDRA has also launched a new product called “MUDRA Card”, which is a Debit card issued on RuPay platform and provides hassle-free access to working capital needs of borrowers. Mudra bank also offers securitization of loans and is also involved in imparting financial literacy to target groups. Women are offered loans at lowered rates by NBFC’S/MFI at a difference of almost 25 bps.
Perhaps the most crucial aspect of the Mudra Yojna is the inclusion of the last mile financers in its fold by means of Microfinance Institutes, Non-Banking Financial Corporations and local lenders. This is also reflected by the fact that 75% of the Mudra loans have been disbursed by MFI’s/NBFC’s (Annual Mudra Report 2016-17). Last mile financers tend to have an incomparable local knowledge and better outreach – a primary requisite for successful and recoverable lending to micro units. Integration of last mile financers has allowed Mudra Bank to register them, accredit them and provide them with refinancing at lower rates which will, in turn, lead to a more efficient credit lending mechanism at the grassroots level.
We look at some of the statistics provided in the Annual Report (2016-17) published by MUDRA to try and gauge the performance of the scheme. 3.8 Lakh Crore loans have been disbursed to 9.13 Crore units as of September 2017. There has also been a growth of 15.04% from the previous fiscal year’s disbursements, with a Rest. 1.53 trillion disbursements in FY17, up from the disbursement of Rs. 1.33 trillion in FY16. Further according to the 2018 budget, Rs. 3 lakh crores have been allocated for MUDRA, a nearly 20% rise from the last year’s allocation of Rs. 2.44 lakh crore. In 2016-17, 78% of Shishu loans, 23% of Kishore loans and 9% of Tarun loans were to women. 94% of the loans have been under the Shishu category (Under Rs. 50,000). Special focus has been laid on providing these loans to weaker sections of the society viz. SC/ST/OBC entrepreneurs. The program has also facilitated the inclusion of nearly 1.25 crore entrepreneurs into the formal credit system.
Although Government is yet to release figures on employment generated by the Mudra scheme, an Independent think tank based out of Gurugram-SKOCH, has done a study in collaboration with 5 PSB’s to extrapolate data for national figures and estimated an approximate creation of 1.6 crore incremental jobs in the span of two years due to availability of Mudra Loans. This study also estimates that 47.75% of these jobs have been to the SC/ST/OBC category.
All this paint quite a rosy picture, yet several officials have raised caution over the activities under Mudra Yojana. Bank Branches have received directives to increase the lending under these categories and even ensure to meet certain target levels of loan disbursements under the Micro Enterprises. In meeting these targets, the NPA’S on these loans are also rising. Although there are no official figures, according to industry estimates, gross non-performing assets arising out of Mudra loans vary between 10 and 15%. This has led to a lot of pressure on bank officials and other lenders associated with MUDRA who now must maintain a fine balancing act between meeting government directed target levels and avoiding bad loans at the same time. In fact, there are very few takers for the refinance schemes as well. According to the Annual MUDRA Report (2016-17) in FY16, Mudra extended refinance worth about Rs. 3,000 crores to banks, which when compared to the micro and small loan portfolio of the lenders amounting to the figure of Rs. 1.53 trillion seems insignificant. All the statistics on loan disbursements must also be taken with a pinch of salt as quite a proportion of these loans might just be renaming as Mudra loans which earlier were being sanctioned under Priority sector lending norms anyway. This also raises the question of whether Mudra Yojana is a case of old wine being presented in a new bottle as schemes such as these have also been launched before without much success. A critical need of the hour is to get a proper grievance redressal mechanism in place that can improve the efficacy of the schemes. Early trends emerging from ground studies suggest that it’s still the borrowers with credible transaction histories and/or existing businesses have been given the bulk of the loans whereas new businesses are refused due to fear of potential bad loans.
There is also a question of whether such low amount lending can generate results of the level as has been claimed by the present government. While the above quoted employment figures have become often used campaigning fodder for the BJP, it has been met by high skepticism amongst critics. Though this sector employs the second highest number of people in the country (next only to agriculture), its meagre when compared to the staggering number of firms. It must also be realized that majority of the MSME’s have been limited to small and microenterprises which are marked by low-factor productivity and, where the many self-employed people in India are not self-employed by choice but due to lack of skills and opportunities. These firms fail to grow-eventually even perish, giving rise to the case of the “Missing middle” in our country. In such circumstances, doling out loans and tax waivers to encourage further creation of micro-industries will not serve the long-term objective of turning the manufacturing industry into a strong instrument of GDP growth and employment. A dynamic change is required in the designing of state support mechanisms for microenterprises which can help them grow from their small beginnings rather than adding more of them.