One of the areas that Dr Raguram Rajan focused on when he made his first speech as RBI Governor was quality of assets. He had indicated that RBI would be looking closely at these numbers and their originators and that there would be little lenience shown to them. Growing NPAs has been an issue in the last two years with a lot of camouflage being alleged by some in the form of restructured assets.
While the talk has largely been on corporate loans that have gone bad, it is also necessary to look at the delinquencies in the priority sector. For example, in FY12, around half of the NPAs of public sector banks emanated from this sector, which contributed to less than 30% of outstanding loans of banks. We have also seen that there has been a lot of thrust being put on inclusive banking, meaning thereby that banking has to be taken to the poor so that they have access to the formal system and do not have to go to the moneylenders. To this effect, RBI has linked new bank licences with the opening of 25% branches in non-banked rural areas. The contention here is that while NPA growth is serious, there can be some contradictions with the objective of inclusive banking as the propensity of priority sector loans going bad appears to be higher than that of regular loans.
Priority sector lending has been spoken a lot by banks as it is politically correct to do so. Also, there has been the non-bankable segment that was supported by MFIs, which later became controversial on account of the high rates charged. Using counter-intuitive logic, if the non-bankable was bankable, then banks would have already been there. Given that banks did not lend to this segment, as most lending is collateral based, and this segment does not generally have collateral to offer and also have more granular demand in terms of quantum, this action was deliberate. Now that we are refocusing on this segment through new banks and, at the same time, talking of controlling growth in NPAs, there is need to revisit our logic.
The accompanying table provides information for the ratio of gross NPAs to total outstanding loans for public sector banks for both priority and non-priority sector loans.
The table shows that the levels of NPAs in priority sector are not just higher but multiple times that of non-priority sector.