Today's Paper

Small loans could turn bad: Rajan

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 Rs. 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.

Credit targets

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.

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.

Countering the BJP, which cited this reference to attack the UPA regime, the Congress claimed that NPAs of public sector banks were a “controllable” Rs. 2.83 lakh crore when the UPA demitted office in May 2014 but now it had gone up to Rs. 12 lakh crore.

The former RBI Governor also revealed that he had shared a list of high-profile fraud cases with the Prime Minister’s Office in order to “coordinate action to bring at least one or two to book” but he did not mention whether it was done during the UPA’s time or the NDA’s.