oppn parties How Rising Defaults Under PMMY Are Further Stressing The Already Groaning Banking System In India

News Snippets

  • PM Modi tells BJP workers that India is in for a long battle against the coronavirus and there is no scope to feel tired or defeated
  • PM Modi asks ministers to focus on exports and new areas and sectors
  • PM Modi asks ministers to prepare business continuity plan post the lifting of the lockdown
  • Corona cases in India cross 4000 and the death toll stands at 124
  • The government decides to double the testing of corona suspects from 10000 now to 20000 in the next three days
  • Flipkart assures employees that there will be no job or salary cuts due to the COVID-19 pandemic
  • Although it was obvious, but the government still clarifies that there is no need to switch off appliances and only lights need to be switched off on April 5 at 9pm after confusion in the minds of some people
  • PM Modi and President Trump decide "to deploy full strength of (Indo-US) partnership" to fight against COVID-19
  • 17 states have reported 1023 cases of coronavirus linked to the Tablighi Jamaat, which translates to 30% of all positive cases in India
  • The government says people should not use alcohol-based hand sanitizers before lighting diyas or candles on April 5
  • The railways say there is no certainty yet when services will resume after the lockdown and a final decision will be taken in the next few days
  • As coronavirus cases multiply in Assam, six north-east states seal their borders with the state
  • Power System Operation Corporation Ltd. (POCOSO) putting all systems and protocols in place at war-footing to ensure there is no grid failure due to reduction in demand on April 5 at 9 pm
  • Power ministry scotches rumours that the power grid might fail due to the 9-minute blackout called by PM Modi on Sunday, April 5
  • Centre asks people to wear home-made masks if it is absolutely essential for them to step out of homes
26 nurses and 3 doctors test positive for COVID-19 at Wockhardt Hospital in Mumbai, facility cordoned off, no entry or exit permitted from the hospital
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How Rising Defaults Under PMMY Are Further Stressing The Already Groaning Banking System In India

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.

The sharp rise in defaults in the Prime Minister Mudra Yojana loans once again shows that it is not prudent to stress the banks by making them lend to people by relaxing or ignoring banking norms due to government schemes. The already groaning Indian banking system will now be under more stress as most of these loans are not likely to be recovered as they are collateral-free. The RBI Deputy Governor M K Jain, while expressing concern at the rising bad loans under the Mudra scheme, said that "while such a massive push would have lifted many beneficiaries out of poverty, there have been some concerns at the growing level of non-performing assets (NPAs) among these borrowers."

Under the above scheme, loans were handed out to three categories of entrepreneurs or would-be entrepreneurs, to make them self-sufficient and generate jobs. Under the Sishu category, startups were provided seed capital of up to Rs 50000, while funding of Rs 50000 to Rs 5 lakhs was provided under the Kishore category to those who had a successful record of running a business for some time. Lastly, under the Tarun category, established businesses were provided loans ranging from Rs 5 lakhs to Rs 10 lakhs.

There was negligible default till the end of 2018-19. Only 2% of the Rs 8,93,000 sanctioned under the scheme till then were reported bad. But in the next six months, there was a huge spurt in these loans turning bad. While the Sishu category reported the lowest default surge, the Kishore category witnessed more than 107% jump in bad loans in the six months ended September 2019. The Tarun category also saw bad loans jump by 71% during this period.

While the slowdown in the economy could have been the major factor in these loans turning bad, one cannot discount willful default on the part of borrowers whose credit appraisals were done in a poor manner by banks. The banks also stand guilty of cavalier monitoring of such loans. The banks are in a disadvantaged position as these loans were not against any collateral and were lent at concessional rates of interest.

All governments must think twice before announcing such schemes that put an additional burden on the banking system. With governments held back by the FRBMA Act and not able to expand fiscal deficit, using banks to finance their pro-poor schemes is the only option. But sooner or later it will either lead to the collapse of the banking system or the money put in to recapitalize these banks would expand the fiscal deficit. Then why not expand the deficit instead of stressing the banks? Only, it has to be done in a way that does not reduce the funds available to private borrowers or results in inflation. That, again, is easier said than done.