Bad debts of public sector banks have surged to a nine-year high, with the corporate sector accounting for the biggest increase. This will be one of the key challenges before the new government.

Indeed, the current favourite to form the new government, the Bharatiya Janata Party, had in its manifesto expressed concerns over the bad debt situation. It promised “necessary steps to reduce non-performing assets (NPAs) in the banking sector” if it comes to power.

According to provisional data complied for 19 public sector banks by the Finance Ministry for the last meeting between Finance Minister P Chidambaram and public sector bank chiefs scheduled for Tuesday, the gross NPAs as a ratio of gross advances have reached 4.44 per cent against 3.84 per cent in 2012-13. Though less than 5.07 per cent as on December 2013, the gross NPAs are still at their highest level since 2004-05 when they touched 5.5 per cent.

Reasons for rise

The agenda paper cites various reasons such as sluggish domestic growth in the recent past, the slow world economic recovery, and continuing uncertainty in the global market for the rise in bad debts. Global uncertainty led to lower exports of various products such as textiles, engineering goods, leather and gems.

The paper cited the ban on mining projects and the delay in clearances that affected the power and iron and steel sector for the rising indebtedness of corporates. It said volatility in raw material prices and shortage in availability of power impacted operations in sectors such as textiles and iron & steel.

The infrastructure sector too suffered due to the delay in collection of receivables, causing a strain on various projects. The paper also pointed to aggressive lending by banks in the past as one of the reasons for their rising bad debts.

Though banks reported bad debts in all buckets, corporates loans were the worst hit, affecting the overall position. The paper said that 14 banks registered fresh slippages of 100 per cent or more. State Bank of Travancore led the tally with 281.8 per cent increase, followed by United Bank of India (270.1 per cent), Corporation Bank (173.6 per cent), Dena Bank (166.6 per cent) and State Bank of Patiala (165.6 per cent). However, Canara Bank managed to lower its bad debts in the last fiscal. Similarly, Vijaya Bank and Dena Bank reported bad debts of less than 3 per cent of their total advances.

Apart from regular monitoring, a few measures have been proposed to improve the bad debts situation. The paper suggested that the issue of delay in disposal of applications by district magistrates for taking possession of assets under the Sarfesi Act be taken up with Chief Secretaries of State governments. Similarly, it advised that the data base of credit information companies, based on the declaration of wilful defaulters by banks, be updated on a real time basis and not at the end of the quarter.