In 2006, I had identified Pradhan Mantri Gram Sadak Yojana (PMGSY) as the dark horse of NDA-1. We had started looking at the scheme with a lot of skepticism and tried to punch holes in it. After studying the scheme and interviewing people to get a preliminary feedback, we went for field research and found a visible difference in the economic activity and everybody happy with the scheme including the people who had not got a road till then or even people whose lands had been acquired to build the road. We came back to face an incredulous economist moonlighting with us, who said that our research is not statistically tenable as everybody is happy with the scheme, statistically some people need to be unhappy. Looking back, I am glad that I told him that our villagers are neither statisticians nor stupid.
PMGSY brought about the most visible benefit of 25 years of Indian Reforms—a marked reduction in rural poverty. Not many knew about it in 2006 and not many even in the government had even heard of it in 2016 till Skoch Group helped everyone re-discover the scheme and the numerous benefits that accrued to rural India because of this asset-inked, economic enablement based targeted spending through a very well constructed scheme. Quite the anti-thesis of Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and much better performing as accepted by N C Saxena, one of the key members of the erstwhile National Advisory Council (NAC), that gave birth to MGNREGS. The Skoch Group recently awarded M Venkaiah Naidu Lifetime Achievement Award for architecting PMGSY.
It is with a sense of deja-vu that I started looking at the Pradhan Mantri MUDRA (Micro Units Development and Refinance Agency) Yojana (PMMY). Very skeptical and cynical to start with and trying hard to find flaws and looking for points of failure. Having looked at hours of anchors jabbering about hits and misses and reading reams of newsprint on two years of the Modi government, I am pleased to report that once again I seem to have found what could very well be the dark horse scheme in the current government—PMMY.
The 59th round of NSSO survey that reported that 51.4 per cent of farmer households are financially excluded from both formal/informal sources of credit. Only 27 per cent accessed formal credit and 73 per cent have no access to formal sources of credit. In light of this finding the Rangarajan Committee defined financial inclusion in watertight terms in 2008:
“Financial Inclusion denotes delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. The various financial services include credit, savings, insurance and payments and remittance facilities. The objective of financial inclusion is to extend the scope of activities of the organised financial system to include within its ambit people with low incomes. Through graduated credit, the attempt must be to lift the poor from one level to another so that they can come out of poverty.”
While there were several attempts like the Financial Inclusion Plan (FIP) later renamed as Swabhiman, not much ground was covered. It essentially lost steam and purpose when Pranab Mukherjee was the Finance Minister. In 2013, Crisil reported that only 40 per cent of India’s population had access to formal banking services. My own studies showed that a large number of these accounts were dormant.
Although financial inclusion entered the political and banking lexicon, the very idea was allowed to degenerate into opening of more and more ‘no-frills’ accounts irrespective of availability of any services or usage of the accounts. It was only with the Pradhan Mantri Jan Dhan Yojana (PMJDY) announced on 15 August 2014 that the sins of 60 years were somewhat taken care of with almost the entire country getting access to banking and other financial services.
|Bank Type||No. of A/c||% of Total A/c|
|Public Sector Bank||3822226||30.64|
|Pvt Sector Bank & Foreign Bank||1777400||14.25|
|NBFC – MFI||6049094||48.49|
|Non NBFC – MFI||105518||0.85|
While the scheme has done quite well, even PMJDY has not been able to make the promised Rs 5,000 overdraft available to many. The figure is a measly Rs 274.02 crore overdraft as on 31 March 2016. Looking at the asset book value, I am grudgingly getting to reconcile with the fact that PMJDY is going to be focused on liability based financial inclusion, i.e., savings, Direct Benefit Transfer etc in the short to medium term and not asset-based inclusion, i.e., livelihood linkage, credit etc. The government would still be well advised to allow a small credit limit on the RuPay cards issued with Jan Dhan accounts. It can be as small as Rs 500 and then gradually increased as there is a credit history built. Accounts that qualify for the Rs 5,000 overdraft should be automatically provided that limit against the Rupay card rather than applying for such a facility. Availability of a general credit card linked with the basic savings accounts is a long standing felt need and a recommendation that I too have made on several occasions.
The fact is that our banks hate to lend to the poor and the regulator has no commitment to development banking or poverty alleviation – the horrible track record on agriculture, MSME and other priority sector lending and the ongoing dip in growth rate of SHG formation is a testimony to that.
|Bank Type||No. of A/c||% of Total A/c|
|Public Sector Bank||1475907||5.34|
|Pvt Sector Bank & Foreign Bank||2153790||7.8|
|NBFC – MFI||22962461||83.11|
|Non NBFC – MFI||743980||2.69|
I developed in 2009, what I call the ‘Skoch Model of Inclusive Growth’ that argued that the job of financial inclusion couldn’t be achieved without taking into fold MFIs, NBFCs, and Post Offices etc. It is here that the PMMY has brought about the first major change—including MFIs and NBFC MFIs in its fold and their outstanding performance at the bottom of the pyramid under this scheme is a testimony to that.
Public Sector Banks (PSBs) have focused on bigger ticket lending to a fewer number of customers under the scheme—though even that is a huge jump in their focus as well as growth in the segment from 33,000 crore to 59,674 crore as on 31 March 2016—a jump of nearly 80 per cent. My own research shows that the actual growth by PSBs may be closer to 40-45 per cent with the rest of the reported loans and growth coming from purchase of asset books from MFI and NBFC-MFI. Whichever box you tick, the fact is that there has been an enormous focus brought in on livelihood-linked credit—irrespective of who the lender is. Rather than the absolute amount disbursed, a better way to analyse the success of MUDRA is to look at the number of beneficiaries. No scheme since Independence has been able to benefit so many and so fast.
I believe that the MUDRA story is better told in percentages than in numbers. 94 per cent of the loans given are under `50,000. Over 68 per cent of account holders have borrowed from MFI and NBFC-MFI (hereafter jointly referred to as MFIs), while PSBs stand at 19 per cent and private banks around 9 per cent.
If you look at new entrepreneurs nearly 50 per cent loans given by MFIs compared to 30.65 per cent by PSBs. Lending to women—86 per cent by MFIs and only 5.34 per cent by PSBs. Lending to Schedule Caste (SC) 82 per cent MFIs and 6 per cent by PSBs. The story is repeated for Scheduled Tribe (ST) with MFIs lending nearly 76 per cent and PSBs 9.53 per cent. Other Backward Castes (OBC) get 77 per cent from MFIs and only 8.5 per cent from PSBs. Even in the case of lending to minorities 73.5 per cent from MFIs and 12.2 per cent from PSBs.
Out of the loans sanctioned to all vulnerable groups, i.e., SC/ST, OBC and minorities, 75.85 per cent were given by MFIs. These numbers bear out the fact that true financial inclusion is possible only through active involvement of MFIs and MUDRA is the first scheme that has recognised this fact and actively engaged with them. This has been achieved without any loan melas or political intervention. This is bringing about a behavioral change and at every step of the scheme the fact that it is a loan being given at commercial rates of interest that needs to be paid back is enforced. Credit history of such a large number of individuals is being captured and created for the first time.
Other key benefits coming out of MUDRA scheme include liberalisation of priority sector loan trading and I believe that this is where the market forces are going to shape inclusive growth—normally something that may be considered an oxymoron.
So, the question then is why is MUDRA doing well and why are MFIs taking to it? First, for MUDRA loans a forward-looking portfolio credit guarantee scheme has been made operational. The first place I looked for a flaw was, is it that because the government guarantees the loan that MFIs have started lending indiscriminately to individuals?
A look at the norms for credit guarantee put that apprehension to rest. The scheme ensures improvement in quality of credit appraisals. 50 per cent loss is covered with the first loss being borne by the lender and premium rates linked to the lender’s rating and NPA performance.
|Bank Type||SC||ST||OBC||Minority||Total||% of A/c|
|Public Sector Bank||360306||159962||901691||498634||1920593||8.54|
|Pvt Sector Bank & Foreign Bank||584695||165103||1106900||448106||2304804||10.25|
|NBFC – MFI||4892200||1241112||8006075||2920382||17059769||75.86|
|Non NBFC – MFI||105881||24869||131225||74077||336052||1.49|
A company called MUDRA Ltd has been formed to refinance portfolios through shortfall in priority sector lending. This facility again is available only to lenders meeting rating benchmarks. Since this refinance is available at low rates, it brings with it caps on lending rates—this creates a win-win situation; access to low-cost funds by MFIs and reduced interest costs for the borrower. Some prominent MFIs have been able to reduce their lending rates by as much as 4 per cent for MUDRA loans.
While bulk of performance of MFIs is from NBFCs, the MUDRA scheme creates a framework for rewarding good practices by even small non-NBFC-MFIs by setting a benchmark that they may aspire to.
One major innovation has been the introduction of MUDRA Card, which is essentially a RuPay Debit Card. Besides the usual ATM and e-Commerce uses, the Card can be used through bank business correspondents. Access is now available on holidays and beyond banking hours. Second, the borrower can draw money in the morning, use it as working capital, purchase of raw material and deposit it back in the evening after making sales during the day. No interest is payable on the entire transaction as the money is not borrowed overnight. There are enough stories of vegetable vendors and such paying usurious interest to unorganised moneylenders for day use of finance. Development Commissioner of Handlooms has done an interesting experiment by issuing these Cards to textile clusters in Varanasi and Orissa through Punjab National Bank. I spoke to three weavers in Orissa, who reported significant benefits and wanted this scheme to be adopted by everyone.
One key success factor of MUDRA scheme has been taking it away from the cold clutches of the RBI and putting it in warmer hands of the government with Prime Minister himself pitching for the scheme and monitoring its progress.
What are the MUDRA loans being used for, given that most of them are under Rs 50,000. My research shows that they are being used for retiring the relatively higher cost debt from both the informal and MFI sectors. So, a number of beneficiaries may simply have moved their loan from one MFI to the other or from a moneylender to an MFI. They are also being used for expansion and starting new businesses. This coupled with priority sector loan purchases by PSBs from MFIs make the first year performance numbers only indicative of a trend and not authoritative numbers of performance. The trend itself is excellent. Though once the portfolio churns settle and there is a credit history available, by 2019 we would be in a position to gauge full impact of the scheme.
So, is MUDRA the best scheme ever, does it need any improvement? I would say it is too soon to anoint it as the best scheme ever as the credit recovery data is yet to roll in. By current estimates less than 2 per cent NPAs have occurred. However, this is too good a situation to remain true. One flaw in the scheme is inadequate focus in the scheme towards making available overdraft and cash credit limits easily and as per requirement of the borrowers. This in itself can turn a lot of MUDRA borrowers into NPAs. A telling number is that only five lakh MUDRA cards have been issued against three-and-a-half-crore or so accounts. So, how are the rest managing the working capital is a question. The weaver success stories that I mentioned above are all working capital success stories and lets face it, our banks hate giving OD/CC limits and I hope that MFIs may do better.
The second big point of failure could be God forbid “A MUDRA Loan Waiver Scheme.” Then again it runs the risk of policy dilution or damage as well as poor, unwarranted or excessive regulation.
In an era when public discourse is dominated by stressed assets at banks, a natural outcome has been a slowdown in lending. Overall credit growth during 2015-16 is estimated to be around 9 per cent. In the incremental lending, which has taken place, MUDRA loans have been prominent. In the space of just one year, these loans make up around 1.7 per cent of the loan portfolio of banks. As large industry struggles with industrial slowdown, stagnant demand and stressed balance sheets, interventions like MUDRA are proving countercyclical.
MUDRA is ushering in a culture of professional borrowing and lending, of discipline through refinance and credit guarantees and an impact on interest rates in the market. These are big changes and will not happen overnight. Yet, if the first year is anything to go by, it has been a promising start.