Mega success on the microcredit front

Directed microcredit of ₹23 lakh crore to 400 million beneficiaries over eight years of the PM MUDRA Yojana (PMMY) at delinquency rates that trail those of the overall banking system is a signal accomplishment. This has involved improving risk assessment by banks and credit companies for providing collateral-free loans to microenterprises. Lenders have worked on their underwriting capabilities to keep bad debts low even during the pandemic, when small enterprises bore the brunt of economy-wide shutdowns. Lending small amounts to a large number of borrowers requires reorienting banking processes to better establish the capacity to repay and monitor the loans through their life cycle. The banking system has managed to do both while emerging from a previous bad debt crisis. This is a testament to improved oversight that has built bigger capital buffers for banks and reduced the regulatory arbitrage with shadow banks.

The priority accorded to microcredit on this scale has some obvious benefits. GoI is pushing the programme to build manufacturing capacity at the grassroots, increase employment and improve financial inclusion. Apart from the economic gains from entrepreneurship and job creation, there are social benefits, too, in empowering women and other segments traditionally handicapped by lack of access to credit. The scheme has met its annual targets except during the pandemic. The post-pandemic economic recovery is dependent on governments attaining fiscal balance while ensuring focused credit delivery to the vulnerable. PMMY achieves the latter by keeping the loan tap open for small enterprises to join a government-led investment upcycle.

Information asymmetry between borrowers and lenders is a hurdle for microfinance. Technology can reduce this by building credit profiles of unsecured borrowers. Credit outreach can be widened by increasing competitive intensity in microlending. Narrowing the infrastructure deficit in backward regions pushes up demand for credit by generating more opportunity for microenterprises. PMMY is a component in an overall reform agenda and its performance is governed by the success of the other parts.