Need to rethink priority sector lending approach
Given the sharp jump in NPAs plus restructuring in corporate sector loans, it is tempting to blame banks for being lax in their lending and monitoring of loans. And while it doesn’t look as if the corporate sector NPA pain has bottomed out, not enough attention is being paid, perhaps deliberately, to the government’s role in worsening the NPA problem of banks. At 15.9%, the ratio of gross NPAs and restructured loans to bank advances for the industrial sector is much higher than the 7% or thereabouts for the agriculture sector for the quarter ended September 2013, according to RBI’s latest Financial Stability Report. But a look at another set of data, also from RBI, is equally instructive.
As of September 2012, according to an RBI working paper by Shashidhar Lokare, priority sector lending accounted for 31.1% of all gross advances but 41.7% of all NPAs; the figures for the non-priority sector were 68.9% and 58.3%, respectively. It is true that the figures will change once you take into account the relatively higher share of restructured assets for industry, but there can be little doubt priority sector lending is a big source of NPAs. More important, with the big R60,000 crore farm loan waiver just ahead of the 2009 elections, a clear rise in NPAs can be seen in the following years—not surprising, since the principal message given was that not repaying loans could be rewarded again in the future. Considering that priority sector lending is mandated at 40% of annual lending, this is a big, and recurring, problem area for banks. A look at NPA ratios for specific banks makes this clear. For SBI, the NPA ratio for its agriculture portfolio is 9.5% as compared to a much lower 4.4% for industry.
While there is, no doubt, a need to channel funds into certain sectors of the economy, it looks apparent that banks, even after all these years, aren’t able to make a go of lending to the agriculture and other priority sectors—while agriculture accounted for 17.2% of all NPAs at the end of September 2012, other priority sector segments accounted for 24.5% of all NPAs. Not that rural cooperatives—which remain the major source of agricultural credit to small and medium farmers, both in terms of the number of borrowers and ticket sizes of loans—are doing much better. Under the circumstances, perhaps a fresh look at how agricultural and other priority sector credit should be disbursed is needed, incorporating both the government’s financial inclusion agenda as also a better business proposition for banks. The priority sector guidelines don’t provide for any preferential rate of interest for priority sector loans though there is some element of interest subvention which helps cushion the credit costs. Perhaps banks need some more support, though it is not clear what shape that should take. The Nachiket Mor committee notes that whenever financial inclusion goals are specified, ‘there is little acknowledgement of risk and cost to serve considerations’. Such an approach, it believes, has had a severe impact, leaving banks ‘reluctant participants’. The priority sector lending model clearly needs a major overhaul.