Raghuram Rajan Flags credit Risks in MUDRA, Kisan Credit Card Loans – possible next crisis

New Delhi: Raghuram Rajan, the former RBI Governor, has cautioned the government about a likely upcoming crisis stating  that government should refrain from setting ambitious credit targets or waiving loans.  

In a note on bank non-performing assets (NPAs) prepared at the request of Murli Manohar Joshi, Chairman of the Parliament Estimates Committee, Rajan said the government should focus on sources of the next crisis, not just the last one,  news agencies reported.

According to Rajan,  credit targets are sometimes achieved by abandoning appropriate due diligence, creating the environment for future NPAs. He cautioned MUDRA (Micro Units Development and Refinancing Agency Ltd)  and the Kisan Credit Card can be potential credit risks for the economy.

Rajan stated, “Both MUDRA loans as well as the Kisan Credit Card, while popular, have to be examined more closely for potential credit risk. The Credit Guarantee Scheme for MSME (CGTMSE) run by SIDBI is a growing contingent liability and needs to be examined with urgency.”

MUDRA loans are offered under the Prime Minister Mudra Yojana or PMMY, which was launched in 2015 by the NDA government. A total of Rs 82,440 crore has so far been disbursed under the scheme in financial year 2018-2019, by public and private sector banks, regional rural banks and micro-finance institutions till date, as per data from the MUDRA website.

He also stated, “Loan waivers, as RBI has repeatedly argued, vitiate the credit culture, and stress the budgets of the waiving state or central government. They are poorly targeted, and eventually reduce the flow of credit. Agriculture needs serious attention, but not through loan waivers. An all-party agreement to this effect would be in the nation’s interest, especially given the impending elections.”

On strengthening the NPA recovery process further, Rajan stated, “Both the out of court restructuring process and the bankruptcy process need to be strengthened and made speedy. The former requires protecting the ability of 17 bankers to make commercial decisions without subjecting them to inquiry. The latter requires steady modifications where necessary to the bankruptcy code so that it is effective, transparent, and not gamed by unscrupulous promoters.”