Big opportunity to fund small firms

Big opportunity to fund small firms

Expand lending to tiny firms using debt market.

The RBI has reportedly warned the government about the small loans given under the Pradhan Mantri Mudra Yojana to micro enterprises turning into a big problem of non-performing assets (NPAs). While NPAs are bad news anytime, they are all the more unwelcome when NPAs are a major shackle on bank lending, as at present. However, at around ₹11,000 crore, of a total lending of nearly ₹2.5 lakh crore under the scheme, bad loans are only 4% of the total lending, far below the bad loan burden on lending to large companies. Caution and better ways of lending to micro enterprises are welcome, but it is too early to conclude that Mudra loans are ripe for a clamp-down.

Microfinance companies report, in normal times, recovery rates upwards of 97%. Small borrowers are desperate to maintain access to the rare window of credit that has opened for them, and service their debt diligently. This would apply to micro enterprises as well. Right now, the Mudra Bank gets funds from banks that have failed to meet their priority sector lending obligation at penal, sub-market rates, and refinances at about 4.25% the Mudra loans issued by commercial banks. The government should, in collaboration with the Small Industries Development Bank and the Credit Guarantee Fund Trust for Micro and Small Enterprises, actively consider a bond guarantee fund that would allow small and tiny enterprises to tap the debt market, directly or through intermediaries. Access to formal credit is more important for small enterprises than ultra-low rates of interest. Credit rating of small and micro enterprises will have to go beyond the parameters employed for larger firms, and mine unstructured data on companies, promoters/owners, their relatives, suppliers and customers.

Indian savers are no longer addicted to bank fixed deposits, and debt funds that invest in a proper mix of low- and high-risk debt, including of small and micro enterprises, could fund micro and small enterprises without any subsidy from the government. The point is to facilitate conversion of this possibility into an opportunity.