Assess repayment capacity better before lending: RBI dy governor tells banks

Collateral-free loans such as the Mudra loans increase the possibility of risaing the  already high non-performing assets (NPAs) of banks unless these are closely monitored throughout their terms, MK Jain, deputy governor, Reserve Bank of India (RBI), has said.

Data showed that NPA ratio or bad loans as a percentage of MUDRA loans were at 2.68 per cent in 2018-19, he sai, adding that the RBI is concerned about growing stress in Mudra loans.
Speaking at the Sidbi National Microfinance Congress 2019 on Tuesday, Jain said banks should eschew the tendency to treat compliance merely as cost and should recognise that proper conduct saves the bank from possible reputational loss and penalties – thus, generates hidden earnings which most banks do not quantify, and hence do not realise.
Banks need to focus on repayment capacity at the appraisal stage and monitor the loans through the lifecycle much more closely. "Mudra is a case in point. While such a massive push would have lifted many beneficiaries out of poverty, there has been some concerns at the growing level of loan performing assets among these borrowers," said Jain.
Pradhan Mantri MUDRA Yojana (PMMY) was launched in April 2015 for providing loans up to ? 10 lakh to non-corporate, non-farm small/micro enterprises. These advances are classified as Mudra loans and given by commercial banks, regional rural banks (RRBs), small finance banks, cooperative banks, micro finance institutions (MFIs) and NBFCs.
Data showed that non-performing assets ratio or bad loans as a percentage of MUDRA loans were at 2.68 per cent in 2018-19, up 16 basis points from 2.52 per cent in the previous year. Interestingly, MUDRA loan NPAs were at 2.89 per cent in 2016-17. Of the 182.60 million MUDRA loans sanctioned, 3.63 million accounts defaulted as on 31 March.
"The application of technology in finance has its own share of risks and challenges for regulators and supervisors. Early recognition of these risks and initiating action to mitigate the related regulatory and supervisory challenges is key to harnessing the full potential of these developments," he said.
The use of technology in the business of finance has led to a radical change in several aspects of banking. Financial technology is a disruptive force that in the future is expected to reshape the financial sector, business models and banking structures, he sad., adding that this paradigm change has posed significant challenges to the banks as well as the regulators. 
Similarly, he said, systemic risk may arise from unsustainable credit growth, increased interconnectedness and financial risk manifested by lower profitability, with data confidentiality and consumer protection other major areas that need to be addressed.
"Microfinance institutions must broaden their client outreach to reduce the concentration risk in their own interest and to serve a wider clientele base. From a financial inclusion perspective they should also critically review their operations so other regions don't remain underserved," he said.
Jain also said some leading ecommerce companies have tied up with banks and non-banking financial companies (NBFCs) to offer working capital loans to their suppliers at competitive terms, most of whom are micro and small enterprises.
He added that the introduction of goods and services tax (GST) has helped the informal economy in a significant manner.
"As a result of much improved digital footprint, micro and small enterprises have become attractive clients for banks and NBFCs and microfinance institutions, thereby reducing their dependence on informal source of funds. The cost of credit for the micro and small enterprises will also decrease meaningfully as lending will shift from collateral based lending to cash flow based lending," said Jain.