PM's Mudra Yogna haunting banks now

by Harish Gupta, National Editor, Lokmat Group

A Lokmat Exclusive story with Table

PM's Mudra Yogna haunting banks now

Rs 6.66 lakh crores “Unsecured” Loans doled out

Harish Gupta

New Delhi, Jan. 16

Facts are sacrosanct; more so when they are told in Parliament by the government. And these were startling when it came to narrating the success of the Prime Minister's ambitious Mudra yogna (PMMY) by the Minister himself and how the Mudra Yogna is now haunting the banks now.

Of the 15.26 crores Mudra loans amounting to Rs 7.26 lakh crores given during the past four years of the Modi regime, 13.75 crores loan accounts fall under the category of “Shishu” loans. These Shishu Loans galloped as much as Rs 6.66 lakh crores which is nearly 90% of the total loans granted.

The Parliament was also told that loans up to Rs 50,000 are classified as Shishu loans and the banks were directed by the PMO that no  collateral guarantees from them be sought from seekers. All these 13.75 crores “Shishu” loans are either new accounts or given to existing entrepreneurs who wanted to set up their own “Pakoda” outlets. These were granted between April 8, 2015 to December 21, 2018. These facts were stated by none other than the Minister of State for Finance Shiv Pratap Shukla on January 1 in the Rajya Sabha himself. Since the Rajya Sabha was continuously disrupted, the question/answer session was also drowned in the din.

The government claimed that “Shishu loans have helped unlock the business potential of small shop owners and vendors by meeting some of their working capital requirements. These loans have helped businesses to add products to their existing offerings and increase inventory to cater to larger set of customers.”

Shukla said the average ticket size of PMMY loans and loans under Shishu category have demonstrated an increasing trend year after year.

But these have started haunting the banks as NDA government’s flagship Mudra scheme has 14 lakh defaulters and the default amount touched an all time high of Rs 11000 crores until December 21 this year. And most of these are under the Shishu category. Why ?

The first is that these loans are being given without any collateral or security, making it difficult for banks to go after defaulters. The second is the over-emphasis on banks to meet loan disbursal targets. In the race to meet the target, the credentials of loan seekers were not being properly verified.

In order to oblige the masters that be, the banks aggressively lent money under the Shishu Loans category.

In 2015-16, the target was to disburse Rs 1,22,188 crore in loan. But banks aggressively lent and gave out Rs 1,37,449 crore loan. In 2016-17, the banks again crossed the target and gave out Rs 1,80,529 and in 2017-18 (as of September) they lent Rs 2,53,677 crore crossing the target by more than 15000 crores.

Modi recently alleged that since Independence, banks lent Rs 18 lakh crores until 2008. But within the next six years, the UPA-II aggressively lent Rs 52 lakh crores- a record and this led to rising NPAs.

So what's happening with the PM's own pet PMMY which is a huge cause of worry now. No one has the answers. But for the record, self-help individuals secured Rs 50000 to each seeker to become vendors/small shop keepers.

Ends

A TOUGH ACT TO FOLLOW

by Harish Gupta, National Editor, Lokmat Group

In Britain, the law to register a joint stock company, instead of waiting for a Royal charter, was enacted in 1844. The same year saw the Joint Stock Companies Winding-up Act that could bring a company to an end and liquidate the assets. 

India inherited so much of its financial processes from its colonial masters yet it remained a laggard in the handling of failed businesses, thus crippling the banks’ resolve to find new borrowers. Sadly, having an economist prime minister trained in Britain didn’t help much. In 2014, India’s toxic loans stood at Rs 13 lakh crore ($195 billion), or a good $20 billion more than the GDP of New Zealand. The government of Dr Manmohan Singh collapsed under a cloud of controversy about sweetheart deals in licences for natural resources, and the consequent ruining of banks. 

This is the background to Prime Minister Narendra Modi’s daring Insolvency and Bankruptcy Code 2016 (IBC) which ought to have come a couple of decades earlier—but better late than never. It is the first step in clearing the mess in which the economy is stuck, in which 240 of the top 500 borrowers belong to the stressed or Elevated Risk of Refinance (ERR) categories. These 240 entities, in their turn, hold about 42 per cent of the total outstanding debt of Rs 28.1 lakh crore. Rather than criticising the Prime Minister for “going slow” on reform, it is time his critics asked if the economy could be back in motion without unclogging the money pipes to and from the banks. 

However, the IBC architecture is complex. It requires armies of Insolvency Professionals (IP) National Company Law Tribunal (NCLT) and the regulator, the Insolvency and Bankruptcy Board of India (IBBI). These professionals will be directed to takeover a troubled company and run its affairs with as much authority as its CEO. And they will of course remain in consultation with a Committee of Creditors. But it is the IP who has to decide the way forward—with either a saving formula (“resolution”), or liquidation. It is different from the existing (and ineffective) business rescue or winding-up procedures, like BIFR and SICA. What is lacking in them is the speed element, which puts IBC in a different league. After being assigned by IBBI, the Insolvency Professional must send his report within 180 days, with an extension of 90 days if the creditors have no objection. But that must lead to the final solution. Its novelty is charmingly spectacular in a city like Mumbai where the pre-Independence textile mills, all falling irretrievably sick in the Sixties, took almost half-a-century to let their creditors sell off the land for residential buildings, offices and shopping malls. 

Led from the front by the Prime Minister, his administration’s urgency to clean up the credit market is evident from the beginning. Last week itself, the Reserve Bank of India, with prodding from PMO, sent a list of 12 stressed accounts to bankers for urgent resolution through IBC. The holders of these ‘dirty dozen’ accounts, with names as familiar as Jyoti Structures, Monnet Ispat, Bhushan Steel and Essar Steel, account for 25 per cent of the current gross Non-Performing Assets (NPA). In India, as in Britain, the process of insolvency resolution has historically been biased on rescue. But, with a rigid time line for resolution or liquidation, IBC leaves no room for dodgy promoters to keep dawdling over airy-fairy rescue plans. In a way, it wouldn’t have allowed liquor baron Vijay Mallya to spend years in India on the excuse of trying to ‘save’ his bankrupt KingFisher airline, and then flee to England. 

The IBC is superior to anything similar in existence in the past. It exhibits a clear understanding of the real-life situations prevailing for asset quality to deteriorate in stages, from doubtful to outright bad. The PSU banks, host to most of the stressed assets, are manned by a crop of cautious bankers who’d give the difficult borrower one more chance before reporting his account to RBI as an NPA. Such extreme step also involves a personal risk. Sniffing a banker-client corrupt linkage, the CBI may knock at the very banker’s door one day. Under the new IBC, however, criminal proceedings are not permitted to interfere with the resolution of the existential problems of an insolvent company. This should give bankers the spirit to report a loan that doesn’t seem right before it gets rotting. 

Still, what is not clear yet is the government’s readiness with the IBC architecture. While IBBI, the regulator, may develop the required personnel and skill sets with time, the NCLT will have a tough time. Its mandate is to hear cases earlier dealt with by the Company Law Board (CLB), in addition to the new IBC cases. In March 2015, the CLB had 4,200 pending cases. All this will now go to NCLT, plus 4,000 IBC cases annually. The latter number may multiply with old BIFR and Debt Recovery Tribunal (DRT) being channeled to NCLT. This may raise workload on the NCLT benches quite sharply, with its solution being large scale fresh recruitment of NCLT judges, many of whom are required to be technically knowledgeable. 

The Indian business professionals—executives, shareholders, lawyers, finance experts—have a mindset coloured by the past culture of being reckless with bank loans. It led to the joke of a borrower visiting his banker in a rickety Maruti 800 to negotiate a loan, but, after defaulting, returning to the bank to restructure the debt, but in a Mercedes this time. One hopes Modi’s IBC will restore parity between the size of the debt and the length of the defaulter’s car.

WHO KILLED THE BANKS?

by Harish Gupta, National Editor, Lokmat Group

Next week, as Finance Minister Arun Jaitley, presents the 2016-17 budget, the fear of many trillions of stressed assets hangs on him like Damocles’ sword. It is a real fear, not an imaginary one, like that of Islamists and Maoists hatching sinister plots from the JNU campus. The ghost of bad loans by banks was stalking the government for quite some time but its enormity became evident after Reserve Bank of India Governor Raghuram Rajan ordered an asset quality review last year of the 40-odd PSU banks for the two successive quarters ending in December 2015 and March 2016.