Kinks in the non-performing assets of public sector banks

Given the tricky bye-laws and categories of credit management in the Indian banking system, headline numbers can be misleading. Photo: Pradeep Gaur/Mint

Ravi Krishnan :Live Mint :20 Nov 2013

Public sector banks are at the receiving end with their impaired assets ratio more than double that of larger private banks

It is generally accepted that directed lending by public sector lenders is one of the major causes for rising bad loans in the banking system. Gross non-performing loans as a percentage of total advances in the priority sector is close to 5.5%; it is only about 3% for the non-priority sector.

However, given the tricky bye-laws and categories of credit management in the Indian banking system, headline numbers can be misleading. As a presentation made by Reserve Bank of India deputy governor K.C. Chakrabarty at a recent conference shows, Indian lenders have resorted to devices such as technical write-offs and restructuring loans to show a reduction in their non-performing assets.

If one looks at the impaired assets ratio, which also takes into account restructured advances and write-offs, then the asset quality is worse for the non-priority sector. The impaired assets ratio for the priority sector is about 9%, while for the non-priority sectors, it is close to 13%.

The largest beneficiaries of these largesse from lenders have been big firms. About 91% of total restructured loans on 31 March was accounted by large and medium industries. Thus, about 14% of large and medium industry loans have been recast compared with 5.8% of overall bank loans.

The deterioration in asset quality is the highest for the industries segment, and within it large and medium enterprises, a segment which accounts for nearly half of the bank credit. Sectors such as aviation and textiles are the worst offenders.

Needless to say, public sector banks are at the receiving end with their impaired assets ratio at 12.1%, more than double that of the larger private banks. On Monday, Mint published an article titled Who pays when India’s billionaires don’t go bust?

With a majority of these impaired assets being borne by public lenders, who have to repeatedly go with a begging bowl to the government for recapitalization, the answer to that question is clear: it is the taxpayer.