Pradhan Mantri MUDRA Scheme Assessment

1. 1
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1
Pradhan Mantri
MUDRA Scheme
Assessment
9th August, 2016

2. 2 2
Sample &
Methodology

3. 3 3
As a part of its efforts to help finance small business entities MUDRA bank is
responsible for creating a good architecture of last-mile delivery of credit to MSMEs.
MUDRA bank has a refinance fund for guaranteeing the loans that are being provided
by Financial Institutions to micro enterprises as a part of the Pradhan Mantri Mudra
Yojana
MicroSave evaluated the Pradhan Mantri Mudra Yojana on the following parameters:
• Effectiveness of the idea
• Capacity of MUDRA to deliver the mandate of financing those outside the
conventional system
• Achievements/success stories to date
• Challenges faced
• Both qualitative survey of applicants and quantitative survey of beneficiaries was used: Total
990 beneficiaries in quantitative survey and Total 70 applicants in qualitative survey
• While an attempt to get proportional representation across FIs was made it is subject to their
willingness to participate and contribute
Review Process
Objectives of the Review
Methodology

4. 4 4
Key Research Findings
Banks have exceled over MFIs in fulfilling objective of PMMY scheme.
Banks are better on customer targeting, product and process features
Despite huge demand, banks are playing extremely safe in releasing
MUDRA loans. Banks pre-select customers, avoid publicity and follow "50-
meters rule" to mitigate risk of NPA.
MUDRA loan has made positive impact on bottom-line of MSMEs. Still,
amount of loan sanctioned is not aligned is to MSME business requirement
PMMY scheme has "delivered successfully" on features it promised.
However, low programme awareness and monitoring make customers
prone to fraud and malpractices.
Contrary to common perception, MUDRA loans provide excellent business
proposition for banks. Bank must be motivated to promote MUDRA loans through
making changes in priority sector guidelines and performance linked incentives.
Status of reporting by banks and MFIs

5. 5
PMMY Reporting
Status of reporting
by banks and MFIs
5

6. 6 6
Incremental finance through Banks and MFIs under PMMY to
new and fresh customer is small and slow. Precise MIS is needed
to focus on new loans.
Microfinance Institutions Network (MFIN) data shows slow growth in clients base (44%)
vis-à-vis loan portfolio (84%) as of 31st March, 2016
MFI outreach as
per MUDRA
website as on
31st Mar-16
MFI outreach as
per MFIN-
Micrometer as on
31st Mar-16
MFI outreach as
per MFIN-
Micrometer as on
31st Mar-15
No. of clients 23,794,427 32,500,000 22,600,000
Amount disbursed 45,904 61,860 37,599
MUDRA performance report FY 15-16 reports that State bank of India has disbursed
approximately INR 12281 crore. However, SBI annual report reports incremental SME advance
of INR 8,063 crore. It suggests that SBI has reclassified existing loan to the tune of INR 4,000
crore as MUDRA loan
SME Advances increased from Rs. 1,81,473 crores in Mar 15 to Rs. 1.89, 536 crores
in Mar 16 (4.44 % YOY growth

7. 7
Institutional Efficiency to
Deliver PMMY Scheme
7
Comparison of
banks with MFIs in
delivering MUDRA
loans

8. 8 8
Banks have been “pro-active” in identifying and disbursing loans
to the “first timers” and weaning them off the moneylenders
First time borrower? Bank(n=617);
MFI(n=879
Had already existing loan? MFI(n=879)
Customers are “in awe”
with changed bank behavior
and concede that had the
bank not approached them
they would have never ever
imagined of taking MUDRA
loan from bank.
Every 4th MFI customer is an old customer
who has been disbursed a MUDRA loan as
reward of loyalty with lower than usual
interest rate of 19%

9. 9 9
“ Yeh loan lene ke baad laga
ki loan lene ke liye bada
aadmi hona zaroori nahi hai,
humare jaisa aam insaan bhi
bina jhanjhat ke loan le sakta
hai”
(Post MUDRA I felt that you need
not be wealthy to get loan from
bank. Common people like us can
also get loan from bank without
any hassle.)
- Customer, Uttarakhand
“Agar bank manager bula ke
INR 10,000 nahi dete to loan
lena humlog ke aukat ke
bahar tha”
(We believed that taking loan from
a bank is beyond our capabilities.
This time bank manager called us
to give us INR 10,000.)
–Customer, UP

10. 10 10
Banks have given “more than double” loans and at much lower
interest rates than MFIs.
While MFI’s interest rate
in the range of
Amount in INR Bank MFI
Average loan applied 64,580 25,152
Average loan
sanctioned
49,315 22,895
of MFI customers
have been charged
loan processing fee.
Charged processing fee? Bank(n=617);
MFI(n=879)
Banks have lent MUDRA
loan with interest rate in
the range of
of MFI customers are
aware that they have
taken loan under
PMMY scheme as
compared to
72%
INR 383
or 1%
Average fee
charged by
MFI is
9.5% - 12.5%
19% - 26%
26% 87%
of bank’s
customers.
of disbursed loan amount

11. 11 11
“ 1 % ke mahine pe loan mil gaya nahi to 3-4% mahine a byaj lagta tha”
(I got loan at much cheaper rate of 1% per month from bank else it is as costly as 3-
4% per month from local moneylender.)
-Customer, Uttarakhand

12. 12 12
Banks’ MUDRA portfolio is diversified and is aligned with
sectors that PMMY scheme promises to cater. In case of
MFIs, “end utilisation” is hard to track and monitor.
0% 0%
3%
65%
12%
1%
10%
5% 4%
10%
3%
24%
28%
16%
2%
11%
3% 3%
Farm related
(Agriculture)
Personal Use Dairy Shop
(Grocery,
Food,etc.)
Cosmetic and
cloth related
Furniture and
related
Vendor
(Vegetable,
Tea, Juice,
Fruit etc.)
Repair and
spare parts
Others
Loan purpose Bank (n=617); MFI(n=879)
Bank MFI
of Bank customers maintain
proper book of account vis-à-
vis 1% of MFI customers
of MUDRA loans disbursed by MFIs
have been utilised for personal usage
such as house repairing, house
construction and daughter’s marriage.
of Bank customers pay income
tax vis-à-vis 1% of MFI
customer
of the MUDRA loans disbursed by
MFIs have found to be used for farm
purpose which defeats the basics
objective of PMMY i.e. to lend to
non-farm sector enterprises
50%
14 %

13. 13 13
“Branch manager ne fal kharidatae
waqt mera business ka nafa nuksan
poocha aur loan de diya. Pehle 10-15
hazar ke liye 2.5% mahina pe loan
lena padta tha.”
(Earlier I borrowed INR 10,000-15,000
from money lender at 2.5% per month.
This time the bank manager asked me to
apply when he was done enquiring my
daily sales and profit while purchasing fruit
from my shop)
-Customer, Uttarakhand

14. 14 14
However, Banks and MFIs complement each other in
terms of loacation profile and gender balance
100% of banks
customers were
found to be male
100% of MFI
customers were
found to be female
MFIs have greater presence in
rural are while the banks have
greater presence in urban area.
“Not sure much about MUDRA scheme but took loan on
advice of bank manager who offered me when I went to
deposit money in my account”
- Customer, Rajasthan
“People like me have approached banks before but banks
reject loan for small time businessmen. Chose bank
because he heard of someone who had applied and
received successfully.”
- Customer, Haryana
Banks are giving to
individual customer on the
merit of their existing
business after proper
assessment, however, MFIs
are giving to groups with
common purpose.
Contribution of individual
loan in MFI portfolio is
negligible

15. 15
“As-Is” Institutional
Practices to Deliver
MUDRA Loans
Illustration of
restrictive policies
followed by Banks
and MFIs
15

16. 16 16
Banks are pursuing “50 meter rule” and “personal relations” as
selection criteria to “hand pick” customers to hedge risk of
unsecured lending.
Yes
85%
No
15%
Had Bank Account before taking
MUDRA? Bank(n=617)
“Jo khas khas hai unhi ko pata chala aur unhi
ko mila. chun chun ke logo ko diye hai aur
vichar karke diye hai.”
(Those who were close to bank staff could get loan.
Bank has carefully and cautiously chosen customers)
-Customer, Uttar Pradesh
Banks are screening customers on basis of
proximity of customer’s shop from bank
branch. In most cases MUDRA customers that
banks have lent to were found to be present
within 50 meters from bank branch
location.
“Paisa doobne ka koi sawal hi nahi hai. Mera ghar
bank se sata hua hai.” (There is no question of default as
my house is next to the bank)
-Customer, Rajasthan
1.Known closely to
manager and staff
2.Old
savings
customer
3.Visible
from branch
Beneficiary location; Bank(n=671)

17. 17 17
MUDRA loan application is “not a customer initated process”.
Banks are shying away from funding “start-ups” and have strictly
communicated to Bank Mitrs to “not collect” MUDRA loan
applications.
42% of bank customers already had
an established business.
“Kiska daant sunenge. Bank manager ka ki
customer ka? Isliye form lena band kar diye. BM
bolta hai jake RM se hi loan sanction karwa lo”
(If I source MUDRA application, I am scolded by customers
for non-processing and bank manager for creating un-
necessary hurdle for him.)
-Bank Mitr
“Naye karobar ke liye loan nahi mil raha hai”
(Banks are not funding for new business)
-Bank Mitr
Bank Mitrs (BM) face dual signal from concerned
banks. While top management asks to source
MUDRA loan, the link bank manager strictly
prohibits them from sourcing. BMs complain that
bank manager does not accept the documents as
they did not want to disburse MUDRA loan for fear
of increasing NPAs.
Funded for existing business?
Bank(n=617)
Banks have also resorted to changing product
code to classify existing loans as MUDRA
Banks are avoiding jewellery shops and vendors
who do not have permanent establishment and
are asking for TIN and property documents.

18. 18 18
Restricted communication and mis-communication from banks has led
false customer perceptions that PMMY scheme is on “first come first
serve” basis, is available from “government sposnsored banks only” and
that the “scheme has closed” already.
Common Bank practices
Target based approach-4 to 10
MUDRA loans per quarter
Pre-selection of loan amount
irrespective of business
requirement
Funding to solvent customers who
need it least for safety of loans
Miscommunicating that
scheme/quota/vacancy under
MUDRA is over
Providing irrelevant reasons to
turn away customers
“Ab loan nahi ho raha hai kyunki bank ka bees ka target pura ho
gaya hai” (Bank’s target of 20 is over)- Customer
“Humko bole ki 50000 ka scheme khatam ho gaya hai ab 10000 hi
milega. Itna to hum Gaanv walo se le lenge wo bhi bina byaj ke”
(Manager told us that scheme of INR50,000 is over and scheme for INR
10,000 is available. That much I can get from relatives without interest)
- Customer Haryana
“Hame jaroorat nahi thi, lekin mil raha tha 10 lakh le liya” (I didn’t
need loan but took to show in accounts)- Customer Rajasthan
“Bank me bola ki niyam khatam ho gaya. (Bank manager told that
the scheme is over) -Customer, Bihar
“SBI group merger ke bad loan milega” (MUDRA loans will be
distributed only post SBI group merger) - Customer,
Uttarakhand

19. 19
PMMY Scheme Impact
Subjective assessment of
impact of MUDRA loan
on performance of
MSMEs
19

20. 20 20
66% of MUDRA beneficiaries are ready to graduate from “Shishu”
to “Kishor” category. Shishu loan has helped customers to
increase current assets and diversify products.
“MUDRA loan se pehle bhi stock rakhne me
dikkat hoti thi. Ab loan ke bad saman aur badh
gaya hai. Isliye ab do dukan le li hai, ek main
chalata hoon aur doosra beta” (I had issues to
keep stocks earlier also but post MUDRA I made
another shop for my son)
-Customer, U.P.
of the beneficiaries accept that the loan has
helped to improve top-line by
“Is loan ko chuka ke kuch paisa aur mil jaye
to gannv me hi thok ka kaam kar sakta hoon”
( I will close current loan and apply for higher
amount to wholesale shop in village itself))
-Customer, U.P.
On an average customer has received INR 33,675
against demand of INR 40,133
Restaurants have increased chairs, cleared
debts of groceries; vendors (fruit and
vegetable) have bought additional
“Petis”(fruit and vegetable bags packets);
grocery shops have increased inventory,
Pan (Beetle shops) have kept dairy
products, carpenters don’t need customer
advance anymore and so on….
84%
20% to 30%

21. 21 21
Food
• Most of
them
took loan
for the
first time
• The
increase
in income
ranges
between
10% to
20%
Hardware
• The size
of the
hardwar
e shop
varies
from
place to
place
• The
increase
in
income
is on
average
10%
Confectionery/Kirana
• Most of
the
Kirana
owners
took
loan for
the first
time
• Increase
in
income
for this
group is
approx.
15-20%
ClothShop
• Most
took
loan for
the first
time
• The
increase
in
income
is
average
10%
ElectronicsShop
• Most
took
loan for
first
time
• The
increase
in come
is on an
average
15%
Possible Impact on the GDP by MUDRA:
A Perspective (1/2)

22. 22 22
Possible Impact on
the GDP by MUDRA:
A Perspective (2/2)
[1] [3]: MSME Annual Report 2014-
15
[2] [4] [5]:
https://www.dnb.co.in/Nashik2013/
PDF/MSMEsInIndia.pdf
Problems
faced by the
industry
Unable to access
adequate and timely
credit.[4]
There is a 73% credit
gap[5] in the sector
Result of
Assessment
Access to credit
can potentially
increase
revenue by 20
– 30%
Assumption
The MUDRA
loan facility
covers the
credit gap of
73% in MSME
sector
Growth due to
access to credit
remains similar
across sectors
Impact
An addition of INR
2.63-3.94 Lakh
crores into the
economy
MSME Statistics:
447 lakh units[1] in organised
and unorganised sectors as on
2013
Contribution to
Economy:
Approximately INR 18
lakh crores[3] or ~37%
of GDP

23. 23
PMMY Scheme
Delivery
Compliance on
guiding instructions
for disbursing
MUDRA loans
23

24. 24 24
No customer has “visited more than twice” to avail MUDRA
loan. Zero collateral, low documentation and quick processing
has resonated with the customers
Satisfied with
overall process
96%
No collateral
99%
Will recommend
MUDRA
95%
MUDRA card (Bank)
16%
Simple documentation
98%
Auto debit/Manual
deposit
9%/56%

25. 25 25
However, low scheme awareness and restricted
coommunication from banks have left customer
vulnerable to “frauds”
Set up camp?
22%
Skill
development
training?
4%
Financial
training
training?
14%
64% of the beneficiaries came to know about the scheme from word of mouth.
Approximately 70% suggested to advertise more to increase awareness about the scheme.
“Ham ab kisi ko nahi batayenge ab to loan ka
samay khatam ho gaya hai, do log ko mana ho
gaya”
( Now I will not refer anyone to apply for MUDRA as
my earlier referrals have already been rejected)-
Customer, U.P.
“Chup chap bank wale loan baant diye.
Pata bhi nahi chala kab scheme aaya
aur khatam ho gaya”
(Banks silently distributed all loans without us
knowing) -Customer, Bihar

26. 26
PMMY Scheme-Way Ahead
Recommendation
to strengthen
PMMY scheme
26

27. 27 27
Existing Status: Banks and MSME
Bank Manager claims
 No incentive to disburse
MUDRA
 People anticipate that in
future loan would be
waived off
 MUDRA has got same
poor perception as KCC or
education loan
 80 out of 100 customers
lok to cheat bank with
money
 Have no clarity on
refinance scheme
Genuine Customer has
 No collateral
 Borrows and repays
informally at high rate
Banks consider MUDRA
 Unsecured high risk loan
 Low value and high involvement loan
 Opportunity for ill-intentioned
customers
92% of the so called “high
risk” beneficiaries repay EMI
on time
Banks Manager fears
 Flocking of branch with perspective
customers
 High NPA
 Increased work pressure with low
productivity
 Mis-judging creditworthiness of borrowers

28. 28 28
Increasing limit in priority sector guideline for MSME sector will
encourage banks to disburse MUDRA loan
A credit scoring model involving PMJDY usage statistics may be
used to assess credit worthiness of borrowers
MUDRA application and sanctioning process of banks must follow
top down approach with centralised receiving and sanctioning
To reduce risks of unsecured funding to MSMEs banks may
consider funding directly to MSME suppliers
PMMY scheme MIS should be improved to reflect status of
incremental financing through banks and MFIs
Recommendations for PMMY uptake