Are public sector banks to blame for rising NPAs? No

If one bank has a high level of NPAs compared to its peers, one would blame that bank. If a majority of banks simultaneously run up high NPAs and most of the NPAs are in a few sectors, it would be overly simplistic to blame banks and ignore structural issues in the economy.

Just a few sectors account for over 50 per cent of NPAs and debt restructuring — infrastructure, power, telecom and iron and steel.

These sectors have borne the brunt of the policy paralysis and indecision of government agencies that have plagued the economy for the last few years.

Private sector banks have managed to maintain NPAs at a low level. Could PSBs have achieved the same? No. New private sector banks account for only 15 per cent of bank advances in India and only 13 per cent of corporate advances.

At that size, it is possible to cherry pick one's clients and sectors.

Public sector banks (PSBs) account for 80 per cent of total credit to industry (corporate credit, excluding retail an agriculture).

If they were to decide to avoid an industry sector, it will be starved of credit and come to a halt. Imagine the consequences if PSBs had stopped lending to infrastructure, iron and steel, telecom and power.

With a credit share of 80 per cent, PSBs define the pattern of credit to Indian industry.

Therefore, if Indian industry is in trouble, it is bound to reflect on its primary lender.

Bad debts of PSBs in retail lending have reduced dramatically in the last two years. But unlike the private sector banks, retail lending is not yet large enough on PSBs’ books to make a difference to their overall bad debt ratio. It is important to note that some large foreign banks, which predominantly lend to the corporate sector in India, have as large an NPA ratio as the worst of PSBs.

A typical public sector banker in India is a compliant, conscientious, and conservative professional, shaped by decades of strong regulation by the RBI and control by the government.

The level of corruption in PSBs is far lower than in the other arms of the government. Public sector leaders rarely speak up. They are easy targets in a blame game.

High bad debt in the banking system points to the state of economic governance. To blame it on PSBs is to absolve those really responsible — the political leadership and the government machinery that supports it. If public sector performance lags the private sector, it is squarely due to the massive constraints under which the former operates.

The government’s inaction and the banking regulator’s silence on PSB reforms need to be addressed. Laying the blame for bad debts on PSBs is to obfuscate the harsh truth.

Read also: >Are public sector banks to blame for rising NPAs? Yes

(The author is Partner & Director, BCG. The views are personal.)

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