MUDRA loans is another crisis in the making, says Raghuram Rajan

Former RBI Governor Raghuram Rajan. File   | Photo Credit: PTI

Former RBI Governor Raghuram Rajan has cautioned that the next crisis in India’s banking sector could come from loans given to the unorganised micro and small businesses, called MUDRA loans, and credit extended through the Kisan credit card.

MUDRA loans are offered under the Prime Minister Mudra Yojana or PMMY, launched in 2015 by the NDA government.

A total of ₹6.37 lakh crore has been disbursed under the scheme by public and private sector banks, regional rural banks and micro-finance institutions till date, as per data from the Micro Units Development and Refinance Agency (MUDRA) website.

In a note on bank non-performing assets (NPAs) prepared at the request of Murli Manohar Joshi, Chairman of the Parliament Estimates Committee, Dr. Rajan said the government should refrain from setting ambitious credit targets or from waiving loans.

“Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk,” Dr. Rajan wrote in his 17-page note.

He also flagged the Credit Guarantee Scheme for MSMEs, run by the Small Industries Development Bank of India, calling it “a growing contingent liability” that needs to be examined with urgency. Dr. Rajan urged political parties to agree on not waiving farm loans

He pointed out that most of the bad loans were created during 2006-08, a period that coincides with the first term of the UPA. “A large number of bad loans originated in the period 2006-2008 when economic growth was strong... it is at such times that banks make mistakes,” he wrote.

‘Small loans is another crisis in the making’

“I’m not aware of progress on this front. This is a matter that should be addressed with urgency,” he said in the note.

Dr. Rajan urged political parties to agree on not waiving farm loans as such waivers vitiate the credit culture and eventually reduce the flow of credit. He defended the RBI against accusations that it created the NPA mess. “The truth is bankers, promoters, and circumstances create the bad loan problem...The RBI is primarily a referee, not a player in the process of commercial lending,” he pointed out.

Similarly, he came out all guns firing on whether forced NPA recognition caused a slowdown in credit and the economy. “Simply eye-balling the evidence suggest the claim is ludicrous, and made by people who have not done their homework,” he wrote.

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Printable version | Jun 19, 2021 12:01:01 AM |

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