India’s banking sector has been under stress of late, thanks to rising concerns about asset quality. As the Business Standard Banking Annual (released today with this newspaper) makes clear, the turn in the interest rate cycle in 2010 has hit the corporate sector hard, coinciding with other macroeconomic issues that have affected the performance of businesses in general. It is not surprising, then, that small and medium enterprises (SMEs) have come under pressure, with their interest payouts nearly doubling from one year to the next. In the second quarter of 2011-12, the asset quality of public sector banks deteriorated sharply, driven by 100 per cent migration to system-based recognition of non-performing assets (NPAs), and loan recovery problems. Interestingly, most of the asset quality problems this time are emerging from the agricultural and corporate sector, unlike during the previous slowdown of 2008, when a large part of the headaches came from the retail sector. As it happens, SMEs constitute less than five per cent of the private sector’s total loan book. In contrast, SME exposure for public sector banks is over 20 per cent. Fresh slippages in the second quarter also reflect the resilience of the private sector banks, which reported slippages to the tune of 100-150 basis points while public sector banks reported slippages of 250 to 300 basis points. Provisions, too, are up for public sector banks, by nearly 40 per cent, while the provisioning levels for private banks are down annually.
As it happens, private sector banks have scored well on almost all parameters. On average, the earnings of public sector banks grew by 10 per cent in the second quarter of 2011-12, and of private sector banks by 26.5 per cent. In terms of credit growth, private sector banks clocked 21.3 per cent, compared to 18 per cent scored by public sector banks. This does not mean that the road is a rosy one for India’s private sector banks. While the pressure of priority sector lending is greater on public sector banks, the deteriorating credit culture in rural India will have an impact on the entire banking system. Despite good monsoons and decent hikes in minimum support prices, non-performing loans in the agriculture sector have gone up by nearly 150 per cent over the last two years, and non-performing loan ratios have increased from 1.9 per cent in 2008-09 to 3.5 per cent in 2010-11 for state-owned banks. The culture of entitlement is now coming home to haunt the banking sector too. Unlike most other businesses, which can hedge their market risk by expanding into rural India, for banking this strategy comes with pitfalls.
