RBI deputy governor asks banks to closely monitor Mudra loans

27 Nov 2019 Evaluate

Reserve Bank of India (RBI) deputy governor MK Jain has warned bankers about the growing stress in Pradhan Mantri Mudra Yojana (PMMY) also known as Mudra loans, which has crossed more than Rs 3.21 lakh crore RPT crore system-wide and asked them to monitor such loans closely as unsustainable credit growth in the sector can risk the system. The government had launched the Mudra scheme in April 2015 for providing loans up to Rs 10 lakh to the non-corporate, non-farm small/micro enterprises and which normally do not get bank funds due to their poor and mostly no credit rating. These loans are extended by banks, NBFCs, RRBs, cooperative banks and small finance banks.

RBI deputy governor said 'Mudra loans are a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of non-performing assets (NPAs) among these borrowers.' He also said systemic risk may arise from unsustainable credit growth, increased interconnectedness, pro-cyclical and financial risks manifested by lower profitability. He noted that it is interesting to see leading e-commerce companies tying up with banks and NBFCs to offer working capital loans to their suppliers, which are mostly micro and small enterprises, at competitive terms.

Stating that GST has hit the informal economy significantly, Jain said as a result of the improved digital footprint, MSMEs have become attractive clients for banks, NBFCs, and MFIs, thereby reducing their dependence on the informal source of funds. He said the cost of credit for MSMEs will also come down meaningfully as lending will shift from collateral-based lending to cash flow based lending. Noting that technology has its own share of risks and challenges for the financial sector regulators and supervisors, he said early recognition of these risks and initiating action to mitigate the related regulatory and supervisory challenges is key to harnessing the full potential of these developments. He added that the focus of the MFI sector must be on digital finance, and data confidentiality and consumer protection are major areas that also need to be addressed by bankers.

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