Random Reflections

The Finance Minister has claimed that in the past eight years, the government has disbursed 41 crore Mudra Loans worth Rs.23 crores. This is not at all the government’s money. These are the deposits of customers given as loans by banks. The Prime Minister has stated that they have created 8 crore new entrepreneurs through Mudra loans and those who criticize it do not understand the benefit of microfinance. He is very much right. His party has immensely benefited from these.

There are three loan schemes under Mudra loans- Sishu, Kishor and Tarun. As per the GOI website, in FY 2021-2022, 77.6% of loans were disbursed under the Sishu scheme, which grants a loan upto Rs.50,000. 20.6% of loans were given out in the Kishore scheme, which grants a loan upto Rs.5 lakhs and only 1.8% loans were disbursed under the Tarun scheme, which has the highest allotment, with an upper limit of Rs.10 lakhs.

The loans are normally given for a period of 3 to 7 years and are guaranteed under the Credit Guarantee Fund for Micro Units (CGFMU). The annual Guarantee fee is 0.37% of the loan and the coverage is upto 7 years. So by now around 50% of the loans must have been closed or renewed. No details are available to know whether these borrowers are still in business or they received any subsequent credit. India has 30.24 crore households as of 2021. That means every household has received at least one Mudra loan and many households have more than one. If every household is into business, who are the customers? Do we see so many businesses around?

As per RBI Report March 2022, there are only 320845183 loan accounts in banks, including Small Finance Banks. This includes all loans small and big. So where are the 41 Crore Mudra borrowers? How many have left the business? How many are still with NBFCs? This requires detailed data which RBI should provide.

Many studies have shown that only 15% of new businesses survive after 5 years for various reasons. The reasons could be anything ranging from marketing, competition, inadequate finance, change in technology, lack of demand or inadequate profit or loss in business. The danger is the lack of support to face these failures. In Israel, known as a start-up nation, the government provides seed money, concessional loans and technical as well as marketing support.

In China, the Development Finance Institution give credit to start-ups with support from the government. The Chinese government institutions support them with technology, capacity building, common facility centers, and marketing and write-off loans in case of failures.

Here in our country, every responsibility is given to the banks. They can do nothing except providing credit and most of the time the credit is inadequate. This is because of the fear of not getting back the loan due to various reasons, the main among them is the political influence through which the borrowers come to the bank.

In this scheme, banks are able to get 75% of the loan sanctioned as insurance and the balance is written off if the account becomes a Non Performing Asset (NPA).

Every government-sponsored loan is seen as a huge risk because of the failures the bankers have seen over a period of time. It does not mean that there should not be government-sponsored loans. There must be. But what is needed is the correct identification of borrowers, training them, providing support services to them, and a little hand holding, with marketing and technology.

We have had the Integrated Rural Development Programme (IRDP) which was the flagship programme of Mrs Indira Gandhi, along with the Prime Minister’s Rozgar Yojana, a scheme for the employment of urban youth, Self Help Group Loans etc. There was a time when banks were providing equity support without any interest to new women entrepreneurs. With the policy of LPG in 1991, all this went away.

In FY 2021-22, loans amounting to 74,29,904 or 13.8% of loans were given by PSBs including RRBs. 2,45,49,895 or 45.6% of loans were given by the private banks of which 1,29,77,246 (52.8%) was given by IndusInd bank alone. NBFCs including MFIs gave out 1,56,04,422 or 29% of loans and the rest were given out by small finance banks. The danger here is that if you default even due to the failure of your business, your name will be included in the CIBIL defaulter’s list, and you will not get another loan even if your loan amount were as little as, Rs10000. Your future as a businessman or businesswoman is sealed.

The failure of businesses leads the youth to unlawful activities, frustration and even suicide. Most families don’t take the risk of funding a new business. Through the process, the youth learn corruption, and adulteration and when they fail they move towards politicians. These are the ones who become hooligans, cow vigilantes, love vigilantes, rapists and murderers. Many of them become local politicians and some of them flourish to become even Ministers. This is dangerous for the country.

Some basic principles should be understood by the government.

Everyone cannot become a businessman or businesswoman. Start-ups require an eco-system and support system. We can literally look around and notice that when one business succeeds, three others fail.

In a town where three grocery shops are flourishing, and we open seven more, all of them will make very little profit and some will run into losses and close down. The same is the case with hotels, readymade garments businesses, shoe shops, mobile shops and so on.

This is where the government has to chip in. It needs to provide more employment through its own system, namely the Public Sector Enterprises, Public Services, and Public Banks! The employees of these enterprises will have the purchasing power to encourage the businesses around them. The same is the case with micro enterprises, micro and small industries, village and cottage industries etc., which will flourish if there is purchasing power.

Politics of loans

As per the data from the year 2021-22, Bihar has disbursed 66,78,155 loans during that year, UP disbursed 57,87,982 loans, West Bengal 56,27,231, Tamilnadu 56,25,146, Karnataka 42,98,481, Maharashtra 41,58,052, Odisha 36,70,907 and Madhya Pradesh disbursed 32,31,804 loans. These numbers have no correlation with the population or entrepreneurship. The ruling party representatives go to the banks and NBFCs and influence them to disburse more loans. They tell the borrower that this is a freebie and need not be repaid without disclosing the consequence of CIBIL. This helps in getting votes because people don’t know that this is not the government money or Party fund. Read more here- How did the banks help BJP to win in UP?

But, this is affecting the repayment culture. Some bank managers avoid these influences and give loans to their own existing customers or their family members under the Mudra scheme.

The private banks charge more for inspection and other charges and promptly report default cases to CIBIL, so the borrower has to return one day to repay the loan. The NBFCs and MFIs charge more interest and other charges and use cruel recovery methods. Please read ‘Tata’s get a loan at 4.5% but the poor pay over 26% for Micro Finance‘. And, finally, it is the youth, who suffer. They try to become entrepreneurs due to a lack of employment opportunities and end up suffering their whole lives. 

What should be done?

  1. Start from the weakest section of society. Give loans to Self Help Groups of women, directly from Banks and not through MFIs, provide them training, capacity building, common facility centres, marketing and in case of failures, insurance support. The Kudumbashree Programme in Kerala is providing this kind of support to a large extent, resulting in 56 lakh women beneficiaries under the scheme.
  2. Start many public sector companies to do business with ethics like the Fisheries Department running fish stalls in Tamil Nadu. These can be upgraded into fish product-producing companies. They provide support to the fishermen. There are many such activities in Tamil Nadu and Kerala.
  3. Provide technology upgradation, product innovation, funding, and marketing support to medium, small, micro, tiny and cottage industries.  They provide maximum employment. Let us learn from China – not everything, but what is good for us.
  4. Banks can become Multi-Purpose organisations providing not only credit but project guidance, marketing avenues, troubleshooting, insurance, technology upgradation etc. For this, they require specialists, more staff, and linkage with educational institutions and the market.
  5. We need detailed studies by academics, RBI, NABARD, Banks and others with critical input on Mudra scheme, Finance to MSMES, SHGs, Agriculture and allied activities.
  6. We need new models, not the Micro Finance Institutions and Non-Banking Financial Companies which are modern-day moneylenders.
  7. Expose the farce of creating new entrepreneurs with just small
  8. Keep political parties away from banks.
  9. Increase the number of Public Sector Banks, their branches, staff and specialists in them.
  10. Create thousands of supporting institutions and structures to support new enterprises run by people.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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