NEW DELHI: The government's agenda for inclusive growth and emphasis on priority sector lending is proving costly for the exchequer, with bad debts of state-run banks increasing to over Rs 30,000 crore till December, 2010. These bad loans — given to agriculture, small-scale enterprises and other priority sectors — are around half of the Rs 68,000 crore non-performing assets (NPAs) of government banks during the same period.
The agriculture sector leads the pack, accounting for 70% of bad loans. In contrast, only 22% loans went bad in small-scale industries ( SSI) sector during April-December 2010 as against 65% of NPAs in 2009-10. This issue will come up for discussion later this month during a meeting of CEOs of PSU bankswith top finance ministry officials, a ministry official said. The assets quality of these banks has also raised concern on efficacy of due diligence on lending.
The review on credit lending will ascertain if the banks are meeting the 40% mandatory lending to priority sectors on their own, or they have been borrowing such loans from regional rural banks (RRBs) and micro-finance institutions (MFIs). If larger NPAs are attributed to such borrowings, the government may restrict these options in future.
In the Budget 2011-12, government enhanced agriculture credit limit to Rs 475,000 crore from Rs 375,000 crore in the previous year. Banks have been asked to step up direct lending for agriculture and credit to small and marginal farmers in a bid to increase farm productivity. But, considering that the banks have pressure from the government to meet the credit target within the financial year, the high-level of NPAs show the kind of compromise is being made on the eligibility criteria.
A similar problem, which had occurred a few years ago nad impacted banks' credit lending and reserves, had to be compensated by government's recapitalization and reimbursement through a farm loan-waiver scheme. A farm loan-waiver scheme announced in 2008-09 to compensate banks made a dent on the exchequer to the tune of Rs 70,000 crore.
Besides, the farm loans, PSU banks have consistently been writing off bad debts of more than Rs 10,000 crore every year to reflect a healthy balance sheet. The gross NPAs of all government banks have grown by 30% in 2009-10 to Rs 57,000 crore, and in the first nine months of 2010-11, it went up by more than Rs 10,000 crore to Rs 68,600 crore.
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