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4) It has been cautioned that the next crisis in India’s banking sector could come from MUDRA loans, and credit extended through the Kisan credit card scheme. Critically examine.(250 words)

Topic– Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

4) It has been cautioned that the next crisis in India’s banking sector could come from MUDRA loans, and credit extended through the Kisan credit card scheme. Critically examine.(250 words)

The hindu

The hindu

Why this question

India is already facing an NPA crisis and any further liability could lead to a serious banking or even economic crisis. So it is important to examine how loans under the two schemes can be a source of India’s next banking crisis.

Directive word

Critically examine- Here we have to probe deeper into the topic,  get into details, and find out the causes or implications if any. Based on our discussion we have to form a concluding opinion on the issue.

Key demand of the question.

The question wants us to look into MUDRA loans, and credit extended through the Kisan credit card, and find out how they could be the cause of the next crisis in India’s banking sector.

Structure of the answer

Introduction– write a few lines about the importance of banking sector for the working of the modern economy.

Body-

  • Write a few introductory lines about the MUDRA and KCC scheme.
  • Discuss in points how the loans disbursed under MUDRA and KCC scheme could lead to the next banking crisis in India. E.g The disbursement under Mudra loans alone is ₹6.37 lakh crore, which is over 7% of the total outstanding bank credit. Given that these are small loans up to ₹10 lakh each, with the borrowers mostly from the informal sector, banks have to monitor them very closely. It is debatable whether banks have the resources and manpower to do this when they are chasing the bigger borrowers for business and, increasingly these days, recoveries. The risk is that these small-ticket loans will drop under the radar and build into a large credit issue in course of time. The same logic holds true for crop loans made through Kisan Credit Cards etc.

Conclusion– discuss briefly as to what should be done in this regard. E.g political parties should agree on not waiving farm loans as such waivers vitiate the credit culture and eventually reduce the flow of credit etc.