Loans to agriculture and micro, small and medium enterprises (MSMEs) were the main contributors to banks’ bad loans in 2011-12.
Agriculture and MSMEs used up only a fifth of bank credit, but they accounted for 36 per cent of banks’ non-performing loans, data from the RBI’s latest Financial Stability Report show.
It is interesting that these two segments make up priority sector lending, which is mandatory for all banks.
Around 4.6 per cent of the agriculture loans and 4.8 per cent of MSME loans were non-performing as of March 2012, according to the report. The proportion jumped by 1.2-1.3 percentage points over the past year.
Jump in bad loans
Loans given to consumers, in contrast, witnessed lower payment defaults. Non-performing loans as a proportion of retail credit fell from 3.2 per cent in March 2011 to 2.8 per cent in March 2012. More than half the consumer loans go to fund home purchases, where default rates tend to be low.
Banks saw a jump in bad loans this year as public sector banks switched to computer-based identification of non-performing loans, instead of manual methods that allowed discretion. Rising interest rates seem to have boxed small and medium enterprises into a corner, making it difficult for them to service their debt. According to a CRISIL Research study, a one percentage point rise in interest rates shaves roughly 14 per cent off the profits of the average SME.
Borrowing costs actually rose by 2.5 percentage points in the 18 months ended March 2012.
Large borrowers
Large corporate borrowers contributed their bit to the banks’ problems too. However, the defaults in this case did not show up in the banks’ books as the advances were restructured.
The slippages in sectors such as power, microfinance institutions, iron and steel and textiles may have been higher but for the restructuring (postponement of dues) on their loans. For instance, restructured advances accounted for as much as 11 per cent of power sector loans in March 2012.
Given the RBI’s estimate that 15 per cent of restructured assets may actually slip into bad loans, the NPAs from these segments may add another 50 basis points to the gross non-performing asset of 2.9 per cent for the banking system.
The overall stressed assets (NPAs and restructured assets) for the banking sector rose from 5 per cent in March 2011 to 6.23 per cent in March 2012.