Crisil SME tracker: Asymmetric Mudra loan disbursals have risk implications

Cumulative sanctions by lenders under scheme topped Rs 3 lakh cr in past two financial years

A QUICK ANALYSIS of disbursements under the Pradhan Mantri Mudra Yojana (PMMY) during the first two years reveals asymmetrical growth, which, if unchecked, could heighten credit risks for banks. PMMY, commonly referred to as the MUDRA scheme, was launched in April 2015. It is aimed at bringing the unfunded micro and small enterprises (MSEs) into the formal financial system and improving their access to affordable credit.
 
Cumulative sanctions by lenders under the scheme topped Rs 3 lakh crore in the past two fiscal years (Chart 1). However, in a marked asymmetry, more than 50 per cent of the sanctions were done in the last quarter of these years. Skews were also visible in other aspects of PMMY advances. For instance, three states accounted for as much as a third of the disbursements in fiscal 2016. What’s more, as per Reserve Bank of India data, there is a conspicuous skew towards the services sector (Chart 2).

 
Besides, collateral-free lending under the PMMY, aimed at easing MSEs’ access to credit, also poses a challenge. The scheme has a target-oriented approach. However, given the recent vintage of the PMMY portfolio, CRISIL believes that aggressive lending to meet targets could result in spiralling of bad loans unless appropriate credit risk controls are in place. While these loans are covered under guarantee of Rs 3000 crore, CRISIL believes that it would be inadequate to absorb potential credit losses, even assuming a non-performing asset ratio of eight to nine per cent for the portfolio.
 
To ensure orderly growth of PMMY and achievement of its objectives, CRISIL believes that a diversified lending approach and the use of appropriate risk assessments — such as peer group comparison and credit analytics — could aid lenders in the underwriting process. This would also ensure an equitable distribution of credit across the manufacturing and service sectors.