Much has been said about the deteriorating bad loan situation for public sector banks (PSBs) in recent times. Many now seem to sympathise with them, citing their ‘compulsions’ on lending to core sectors such as infrastructure. But higher exposure to industrial loans is not the sole reason for the PSBs’ bad loan problems. Inefficient credit appraisal systems have played a big role, too.
It may be easy to attribute soaring bad loans of PSBs to the weakening economy, but if the economy was the reason, how come private banks alone were able to bring down their NPAs sharply during this period?
If infrastructure loans are the current pain points for PSBs, some private banks ran similar risks from their huge unsecured retail loans during the financial crisis. But they took tough calls to write off such loans and contain risks by tightening their appraisal systems.
PSBs in contrast do not seem to have taken much action to step away from stressed sectors when their problems escalated. After the financial crisis in 2008, the loan growth for private banks slowed down considerably to 8-9 per cent as they took a cautious stance on new lending, but credit by PSBs forged ahead at 20-25 per cent through 2009 and 2010.
For instance, even though data shows infrastructure projects stalling and new projects declining from the beginning of 2010, PSB lending to the infrastructure sector continued to grow at a scorching pace of 44 per cent in 2010-11 and 25 per cent in 2011-12.
So what did these loans fund, if not new projects? Once sanctioned, PSBs kept disbursing funds to distressed corporates to fund working-capital requirements — throwing good money after bad. This has left them with a disproportionate share of doubtful credit; PSBs’ share in NPAs has increased sharply from 65 per cent in March 2009 to 86 per cent in March 2013.
But then, high NPAs is not the only problem for public sector banks, which have dealt with even higher NPAs of 14 per cent (as a proportion of advances), pre-2001.
Restructured assets for PSBs are now twice the size of NPAs — a sign that banks have been kicking the can down the road, rather than facing up to the problem. If extending a ‘lifeline’ to businesses is the line of argument, then why not extend similar generosity to small businesses? But over 90 per cent of restructured loans belong to large corporates.
Numbers suggests that public sector banks’ stressed are nearly 100 per cent of their net worth. And less than a third of these bad loans are provided for.
It is not just PSB finances that will be at stake if the banks do not contain slippages in assets.
Minority shareholders will be short-changed too, as new capital comes in at much discounted prices. Instead of banking on a revival in the economy to rescue them, PSBs need to set their houses in order.
Read also: >Are public sector banks to blame for rising NPAs? No