MUDRA Scheme - Is it a game changer for job creation?

MUDRA Scheme - Is it a game changer for job creation?

Thursday, October 1, 2015

MUDRA Scheme :

Finance Minister ( FM) of India has rightly decided to accelerate the disbursement of bank fund to Small Business . In the week ended  26th September 2015 , FM has announced a sharp increase in quantum of credit flow amounting to about Rs 1.25 lac crores  to small business under MUDRA scheme by March 31st ,2016. I appreciate the purpose of the scheme and also the tone of FM while making this announcement. He told that his government was against the distribution of doles ( he may be referring to infamous " Loan-mela" of the past ). I do hope that he meant what he was saying. Considering the very poor status of our implementation record, proper precaution is required to prevent MUDRA scheme to be termed as loan defaulters scheme. 

Why I am telling this ? 

In the early part of last decade , Union Government introduced an excellent scheme to create large number of entrepreneurs. Credit Guarantee Trust for Micro and Small Enterprise ( CGTMSE) guaranteed scheme was a scheme where significant portion of loan given to Micro and Small Entrepreneurs can be claimed from Government of India in case the loan turns bad. However certain due diligence has to be carried  out by the lending institutions to get this coverage. I feel that this is an excellent scheme to build large number of capable entrepreneurs in the country. 

However the present status of the scheme is quite pathetic. Whenever I interact with bankers  about this scheme, almost all of them treat this scheme as a very bad scheme as the default rate is very high . Besides Small Industrial Development Bank of India ( SIDBI)- the claim settlement agency under the CGTMSE scheme  is disallowing  large number of claims due to noncompliance of norms ( which may be true or may not be ) . Since banks did not get the claim, many banks have decided to stop this scheme. . 

If we analyse the scheme, this scheme is aimed towards borrowers who can handle projects of higher amount. The maximum coverage is 62.5% of the loan amount ( the ceiling of loan amount is Rs 100 lacs ) . With Rs 100 lacs of debt , an excellent business can be developed if proper borrower is selected by banks. However, ground reality ( as collected from interaction of bankers ) is that quite a high amount of fraud and willful default have happened under this scheme. 

Status of CGTMSE : 

I strongly feel that banker could not select the borrower properly under this scheme. Bankers did not evaluate the business running capability of the borrower before lending under this scheme. Considering the higher ticket size of loan , the number of borrowers are substantially lower compared to what bankers would have to negotiate under the current MUDRA scheme. The moot question is if bankers could not select borrowers properly under CGTMSE scheme, how would they be able to select  borrowers under MUDRA scheme when they have to select substantially larger number of borrowers . 

Two issues to be sorted out very fast : 

First Issue :

In today's situation , one of the factors for success of business is the minimum size of the business. Very small loan may make the business of a borrower unviable from the beginning itself. Considering the smaller ticket size of loan under three categories of borrowers of MUDRA scheme ( Sishu - maximum loan amount is Rs 50000/- , Kishor- maximum loan amount is Rs 5,00,000/- and Tarun- maximum loan amount is Rs 10,00,000/- )  , there is a question mark about viability of many projects under the scheme. So Indian Bankers Association ( IBA) must frame a comprehensive but objective guidelines for selection of projects under the MUDRA schemes. If we do not follow this process, then banks would land up by lending unviable businesses resulting in very high amount of bad loans under the scheme. 

There were government sponsored schemes like SEPUP,SERSU, IRDP and the track records of these schemes were pathetic. One may argue that the per account loan amount of these scheme was very low. However , if we apply the time value of money, Sishu and Kishor borrower would perfectly match the borrowers of some of those schemes. I strongly feel that this issue has to be sorted out before it is too late to salvage the situation. 

Second Issue : 

The second most important issue is the hand holding part of the business. Many borrowers under these three schemes would not possess capabilities to handle the complexities of present day's business. So unless they have been given proper training and guidance , many borrowers would fail in the highly competitive market. I do not see any effort of the government on these fronts. A very objective market linkages with a strong commitment of buying of the products and services of these borrowers is absolutely necessary to make the MUDRA scheme successful. Government must come out a clear cut road map to address this issue very fast. 

Act Fast before it is too late :  

There are some more issues regarding MUDRA schemes. I have just mentioned two important issues . I do not doubt the intention of the government . However, good intention need not necessarily translate into desired outcome. We should be bothered about the outcome . Accordingly, if government does not resolve the fundamental issues ( like two issues I have mentioned ) , I am afraid that an intrinsically excellent schemes like MUDRA may face the same fate like CGTMSE scheme.