It is a sign of the earnestness with which banking sector reforms were pursued that NPAs (non-performing assets) of public sector banks dropped from 24.8 per cent in 1993 to 15.9 per cent in 1998, to 7.8 per cent in 2003 and, finally, to an encouraging 2 per cent in 2008.

While the share of priority sector NPAs in the total rose steadily in the first eight years of this century, this was only because progress on priority sector NPAs, by recovery or write-offs, was slower. Nevertheless, these NPAs, too, declined in absolute terms.

It may be just a coincidence that this healthy trend came to an abrupt end after Mr P. Chidambaram wrote off a large chunk of agricultural loans while unveiling the UPA's last full-year Budget before the 2009 General Elections.

Sudden surge

But the large and sudden surge in priority sector NPAs by end-March 2008 does seem to suggest that people held up repayments in expectation of a write-off. This will ring a bell with microfinance institutions; in the end, sauce for the goose is sauce for the gander.

Be that as it may, priority sector NPAs rose rather than fell the year after the Rs 12,000-crore write-off (the rest of the Rs 40,000 crore given by the Government was used to reimburse cooperatives and regional rural banks) — and registered a 27 per cent increase the year after that.

Of course, non-priority sector NPAs, too, have begun rising, in absolute terms. But this is likely to be purely on account of the lagged effect of the financial crisis. To the extent that this is so, ‘other' NPAs can be expected to rise further.

RBI's ‘Financial Stability Report' provides no data on this. But it does sound an alarm about the forced use of credit for promoting ‘financial inclusion', without quite putting this into words; merely noting that priority sector NPAs and agricultural NPAs grew by 28 and 60 per cent respectively during 2010-11.

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Published on June 15, 2011