Bad loans in banks' priority sector lending portfolio have caught the Reserve Bank of India's eye.

The possibility that the banks' exposure to the agriculture, micro and small enterprises, and housing segments could be under stress has prompted the central bank to ask them for the relevant data.

The central bank has sought data from all commercial banks on their outstanding bad loans to the priority sector for the financial years (April to March) 2010 and 2011.

Specifically, the RBI wants banks to reveal their bad loans position in respect of their direct advances to small and marginal farmers; micro and small enterprises (MSE); education; housing; and other priority sectors (manufacturing, services, micro-credit, export credit and weaker sections).

Impact of slowdown

Bankers say pressure on asset quality is building up, especially in the case of loans to small and marginal farmers. These farmers are facing a double whammy as, on the one hand, input and labour costs have gone up, while, on the other, prices of farm produce such as potato, onion, chilli, garlic and some pulses have come down drastically.

With the global as well as domestic economies experiencing a slowdown, borrowers in the MSE category have been impacted adversely as demand for their goods and services has fallen even as they face delays in realisation of their dues from large vendors. All this has made them fall behind on loan repayments.

The MSEs have also been done in by rising interest rates. Since March 2010, when the RBI embarked on an interest rate tightening cycle to curb inflationary pressures, banks' lending rates have increased by almost 3.50 percentage points.

Home-loan borrowers, especially those who have taken loans up to Rs 10 lakh, too have been impacted by rising interest rates as their equated monthly instalments have gone up sharply. This has undermined the borrowers' ability to service loans.

Key sectors

The RBI has flagged the issue of deterioration in banks' asset (loan) quality in its latest financial stability report.

The year-on-year growth rate of non-performing assets, at 30.5 per cent as at end September 2011, has outpaced the credit growth of 19.2 per cent.

Key sectors that contributed to the increasing NPA trend were the priority sector, retail, real estate and infrastructure. The gross NPA ratio increased from 2.3 per cent to 2.8 per cent between March and September 2011.

Banks' priority sector lending (PSL) portfolio has grown marginally in the financial year so far. As per the RBI's latest data on sectoral deployment of credit, banks' PSL portfolio stood at Rs 12,53,947 crore as on November 18, 2011, against Rs 12,39,386 crore as at March-end 2011.

(This article was published on January 11, 2012)
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