Only 3% Mudra loans can generate monthly income of more than 10,000

The Narendra Modi government has claimed that its flagship Mudra loan scheme is generating employment. But, data shows a miniscule number of Mudra loans generate a return that satisfies even the minimum wage requirement.

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Prasanna Mohanty

New Delhi

January 29, 2019

UPDATED: January 29, 2019 08:14 IST

Primary aim of Mudra was to increase credit flow into the MSME sector. Data of past four years shows that this has not happened.

HIGHLIGHTS

• The Modi-led govt has been showcasing the Mudra loan scheme to claim that millions of jobs are being created
• There is no official data available on the number of jobs created due to the Mudra loan scheme
• An examination reveals that only 3% of Mudra loans can generate a return, or income, that satisfies the minimum wage requirement

Confronted with widespread criticism of growing unemployment and jobless growth, the Narendra Modi-led central government has been showcasing the Mudra loan scheme to claim that millions of jobs are being created. No less than Prime Minister Narendra Modi himself declared in his address to the nation last Independence Day that Mudra loans had been given to 130 million people, of which 40 million were first timers. He had said that the "the initiative has helped multiply jobs".

Closer examination of Mudra, however, presents a different picture.

There is no official data available on the number of jobs created due to the Mudra loan scheme. However, an examination of the type and number of loans given out reveals that only three per cent of Mudra loans generate a return, or income, that satisfies the minimum wage requirement.

The examination also reveals that credit flow to the MSMEs (medium, small and micro enterprises)-the primary objective of Mudra scheme- remains below par.

Not just that, a significant chunk of Mudra funds (about 40 per cent) remains idle. Worse, economists and bankers, including former RBI Governor Raghuram Rajan, have warned that Mudra loans could be the source of the next non-performing assets (NPA) crisis.

Let's first look at Mudra loans and their potential to create jobs.

Mudra loans are capital, not income. What this means is that the loans in themselves cannot create can an income. The amount has to be invested and that investment will generate income.

Mudra loans are of three types: 'Shishu' (covering loans up to Rs 50,000), 'Kishore' (covering loans between Rs 50,000 and Rs 5 lakh), and 'Tarun' (covering loans between Rs 5 to 10 lakh).

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Official data shows that 87 per cent to 93 per cent of all Mudra loans (in numbers) are of the 'Shishu' type, 6 per cent to 10 per cent are 'Kishore', and only 1 per cent to 2 per cent are 'Tarun' loans.

When the data for 'new loans'-the potential source of new jobs-are examined for 2016-17 and 2017-18, it is found that the average size of these loans (taking the higher end) were: Rs 23,083 for 'Shishu', Rs 2.09 lakh for 'Kishore' and Rs 7.67 lakh for 'Tarun.

Now, these loans are not income but capital for business that needs to be invested.

How much income can they generate?

Here is a back of the envelope calculation.

Taking a liberal account, let's take a hypothetical scenario when the new businesses perform well and each loan generates a 20 per cent return. Even in this hypothetical situation, 'Shishu' loans can generate a maximum of Rs 4,617; 'Kishore' Rs 41,844 and 'Tarun' Rs 153,445 in a year.

The monthly return, or "income", works out to be: Rs 384.75, Rs 3,487 and Rs 12,787, respectively.

Mudra's employment potential is very limited

If one were to take the monthly minimum wage for 'unskilled agriculture labour' - fixed at Rs 355 per day in September 2018 or Rs 10,650 per month -then only the returns from the 'Tarun' category of Mudra loans, which generate a monthly income of Rs 12,787, satisfy the monthly minimum wage requirement.

The number of new 'Tarun' loans in 2016-17 and 2017-18 was 6,99,582. (2,93,000 for 206-17 and 4,06,582 for 2017-19).

Can this be the number of new jobs that Mudra is creating?

Theoretically yes, but two caveats are in order.

First, no official or unofficial data exists to prove it.

Second, the last NSSO report of 2014, Key Indicators of Debt and Investment in India, showed that in 2013, 60 per cent of all loans in rural areas and 81.7 per cent of all loans in urban areas were taken for non-business purposes (like marriages, construction of houses, health and education etc.), rather than for business.

This pattern could very well be repeating with Mudra, thus drastically reducing its employment potential.

40% Mudra funds lying idle

Mudra's efficacy or usefulness is highly questionable for two reasons.

Firstly, Mudra's annual report for 2017-18 shows that during 2016-17 and 2017-18, it has lent only 60 per cent and 61 per cent, respectively, of the funds available to it. This means that 40 per cent of the Mundra funds are lying idle.

Secondly, RBI data on the sectoral deployment of bank credits shows that the growth in credit flow to MSMEs remains below par when compared to that of both the non-food (agriculture and allied activities, industries, services and personal) sector and the priority sector (agriculture and allied activities, MSMEs, housing, microcredit, education or other support to weaker sections etc.).

While comparing the data for March 2015 (a month ahead of Mudra's launch) with that of March 2018, we find that the credit growth in the non-food and priority sectors was 28 per cent and 27 per cent, respectively, but that of MSMEs (manufacturing and services) was only 24 per cent.

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Similarly, while comparing the growth between November 2014 and November 2018- the latest RBI data- we find that the growth of credit to the non-food and priority sectors was 41 per cent and 36 per cent, respectively. In comparison to this, the growth of credit to MSMEs (manufacturing and services) was 33 per cent.

If the growth of credit to the manufacturing MSMEs alone are taken, it is actually in the negative (-2 per cent) between March 2014 and March 2018 and just 1 per cent between November 2014 and November 2018.

Mudra: Potential source of next NPA crisis

Collateral-free loans like Mudra are prone to turning into NPAs. Former RBI Governor Raghuram Rajan had, in September 2018, red-flagged Mudra loans as the "possible source of next banking crisis" in his deposition before the Lok Sabha Committee on Estimates.

Similar concerns had also been expressed by the chiefs of PSU banks like SBI and PNB to the Parliamentary Standing Committee on Finance.

More recently, in January 2019, RBI cautioned the government over NPA spike in Mudra loans, pointing out that it had risen to Rs 11,000 crore.

The story in a nutshell

Mudra loan scheme, which is one of the Modi government's pet schemes, has failed to deliver. The government claims that millions of jobs have been created from these loans and that it has had a multiplying effect on job creation (one job creating many other jobs).

However, an analysis of data of the Mudra loans reveals that this is a far-fetched claim. The reasons are:

• Most of the loans availed under Mudra are of low value (less than Rs 50,000)
• Of the three types of loans available, only the 'Tarun' loans (for Rs 5-Rs10 lakh) have the potential to give returns which are higher than the minimum wages fixed by the government. However, only 1-2 per cent of the loans availed under Mudra fall in this category.
• Nearly 40 per cent of the Mudra loan funds are lying idle
• Since Mudra loans are collateral-free, they run a high risk of turning into non-performing assets and balloon into a major banking crisis.
• Primary aim of Mudra was to increase credit flow into the MSME sector. Data of past four years shows that this has not happened. The credit flow in this sector has been slow and even negative, thus, defeating the very purpose for which the Mudra scheme was envisioned.