Non-performing assets (NPA) | Bad Loan: Raghuram Rajan Has a Warning on Loans to MSMEs

The next build-up of non-performing assets could be in Small and Medium Enterprise Loans (MSMEs) under SIDBI's credit guarantee system, Raghuram Rajan, former Governor of the Reserve Bank of India (RBI). , has warned. The government should focus on the sources of the next crisis and, in particular, refrain from setting ambitious credit targets, he added.

Rajan said that credit objectives were sometimes achieved by abandoning the appropriate due diligence, thus creating the environment for future NPAs. "Both the MUDRA loans and the Kisan credit card, while popular, need to be examined more closely for potential credit risk.The credit guarantee system for MSMEs (CGTMSE) managed by SIDBI represents a liability possibly growing and needs to be considered urgently, "he said in a 17-page memo to the Estimates Committee, according to a Bloomberg report.

The committee had invited Rajan to inform him after the former chief economic advisor, Arvind Subramanian, had praised him for identifying the NPA crisis and trying to solve it.

Uday Kotak, Asia's richest banker, also shares Rajan's views. In a conference call after Kotak Mahindra Bank's first-quarter results, the banker expressed concerns about loans to MSMEs due to mispricing of collateral for these loans. "If you and I were talking about project financing and corporate loans in 2011-2012, it was me who raised concerns about the fundamental solvency of some of these important project loans." And the real truth of these valuations … I think that there is a reasonable reason to believe that there is a significant over-valuation of collateral in the banking and financial sector, "Kotak said.

Launched in 2000, the Credit Guarantee Fund for Micro and Small Enterprises (CGTMSE), now known as UDAAN, has registered cumulative guarantee approvals of over 25,000 rand for a total amount of over Rs 1.25 million.

A few months ago, a joint study by SIDBI and the credit bureau Cibil had declared that risky loans worth 1.2 million rupees for MSMEs could potentially create value-added NPAs. of Rs. 16,000 by March 2019. It was too early to say that they were at their lowest, he said.

The strong demand for credit in this segment, particularly under the effect of the formalization of the demand for credit, should make it possible to control the overall rate of the NPA in this segment.

To tackle the trade financing problems of MSMEs, the government announced last May that it would double the credit guarantee by 50,000 rupees for 2018-2019 under the CGTMSE program. "We allow non-bank financial companies to provide partial guarantees, and this year, unlike in previous years, when we used to guarantee a credit flow of 19,000 to 20,000 crores each year over the course of three years. In recent years, we expect .can touch Rs 50,000 crore, "secretary of the MPME AK Panda said at a conference.