Corporates Responsible for More Than 80% of Bad Loans of Public Sector Banks

One of the points that we have been making regularly in our columns and Letters is that public sector banks should not be lending to corporates. And now we have found more data to back it.

In a written answer to a question raised in the Lok Sabha, the government provided data regarding the accumulated bad loans across different areas of lending. Bad loans are basically loans on which repayment has been due for 90 days or more.

Take a look at Table 1.

Table 1:

As on March 31, 2017IndustryAgriculture and
Allied Activities
ServicesRetail LoansOther loans
Total NPAs4,70,08457,02184,68623,7955,470

Source: Unstarred Question No: 4614, March 23, 2018 

It is clear from the above table that lending to industry forms a bulk of the bad loans of public sector banks. The total bad loans of public sector banks as on March 31, 2017, had stood at Rs 6,41,057 crore.

This basically means that lending to industry forms 73.3% of the total bad loans of public sector banks. Or to put it a little differently, lending to industry forms nearly three-fourths of the bad loans of public sector banks. Take a look at Table 2, which basically lists out the proportion of bad loans that have accumulated for public sector banks, from different forms of lending.

Table 2:

Sector (As on March 31, 2018)Proportion of bad loans in each sector
Agriculture and Allied Activities8.89%
Retail Loans3.71%

Source: Author calculations on data taken from Unstarred Question No: 4614, March 23, 2018 and Centre for Monitoring Indian Economy 

Table 2 tells us very clearly that the industry and services sector are together responsible for 86.5% of the accumulated bad loans of public sector banks. This basically means that Indian corporates (because while lending to the services sector also, banks are lending to corporates) are responsible for more than 80% of the bad loans of public sector banks.

Of course, one can’t just look at bad loans in isolation of the total loans given out by public sector banks in each of the different areas. Take a look at Table 3, which lists the proportion of the overall loans, given to each sector.

Table 3:

Sector (As on March 31, 2017)Proportion of loans
Agriculture and Allied Activities13.99%
Retail Loans22.83%

Source: Centre for Monitoring Indian Economy. 

Table 3 makes for a very interesting reading. The total lending to industry by public sector banks forms around 37.8% of the total lending. On the other hand, as we can see from Table 2, the lending to industry is responsible for 73.3% of bad loans. This clearly tells us where the problem with Indian banking is.

Now, let’s take a look at Table 4, which basically lists the bad loans of different sectors as a proportion of total lending carried out to that sector.

Table 4:

SectorTotal Bad loans
(in Rs crore)
Total loansBad loans
(in %)
Agriculture and Allied Activities57,0219,92,387.005.75%
Retail Loans23,79516,20,034.001.47%

Source: Author calculations on data taken from Unstarred Question No: 4614, March 23, 2018 and Centre for Monitoring Indian Economy 

What does Table 4 tell us? For every Rs 100 that Indian public sector banks have lent to industry, Rs 17.5 has not been repaid. For retail loans, the bad loans rate is 1.47%. This shows the difference between lending to industry and lending to individuals.

Finally, let’s take a look at Table 5, which lists the retail NPAs and the industry NPAs of different banks as on December 31, 2017.

Table 5:

Name of the bankRetail NPA in%Industry NPA in %
State Bank of India1.321.9
Bank of India2.627.6
Syndicate Bank416
Bank of Baroda3.416
IDBI Bank1.439.4
Central Bank of India4.623.5
Bank of Maharashtra4.415.3
Andhra Bank1.829.1

Source: Investor/Analyst presentations of banks. 

One look at Table 5 makes it clear that public sector banks do a fairly decent job of lending to the retail sector. The retail bad loans are all less than 5% in every case, whereas the corporate NPAs are higher than 15%.

There are multiple reasons for this. There is no pressure from politicians to lend to crony capitalists when it comes to retail lending. The managers can carry out proper due diligence while giving the loan.

There is very little incentive for the manager to crack a deal on the side, with a retail borrower (unlike is the case with a loan given to industry) and give a loan, where he shouldn’t be giving one. This is primarily because the average loan amount is much smaller in case of a retail loan than a loan to industry, and any dishonesty while giving a retail loan is really not worth the risk.

In case of default, the legal system can be unleashed on to the retail borrower, unlike a loan given to industry, which has access to the best lawyers. A retail defaulter is unlikely to leave the country, like has been the case with several corporate defaulters, in the recent past. The asset against which the loan has been given to a retail borrower can be easily repossessed in case of default, unlike is the case with a loan given to industry.

In case of a home loan, which forms a little over 50% of all the retail loans given out by banks, the value of the home against which the loan has been given tends to much more than the outstanding loan at any point of time. This is primarily because banks don’t fund 100% of the value of the home, getting the borrower to put in at least 20% as a down payment. Over and above this, most homes in India when they are bought also involve the payment of a black component and this adds to the margin of safety of the bank.

In comparison, many loans given to industry are gold plated where the borrower essentially fudges the cost of the project, takes a higher loan than he should and then tunnels money out from the project, thus having very little of his equity in the project. In some cases, the value of the asset against which the loan has been taken tends to be lower than the value of the loan.

Narrow banking is the solution. Most of the public sector banks in India, should not be lending to corporates.

It will ensure that Indian public sector banks do not end up in the mess that they currently are in, anytime in the near future. The trouble is the politicians aren’t going to like it because it is the crony capitalists who fund their elections at the end of the day. And where do crony capitalists get their money from?

The other problem is that if banks do not lend for long term projects, what is the alternative arrangement? The corporate bond market in India barely exists. Pension funds, provident funds and insurance companies, prefer to invest in government bonds, and do not really have the expertise to invest in long term corporate projects. The project finance institutions of yore do not exist, having turned themselves into retail banks.

Having said that, the first and the foremost function of a bank is to ensure the safety of the money of the depositors.

To conclude, all these factors leave the public sector banks in India, in an extremely vulnerable space. As far as the government (or should I say governments) is concerned, all it has done is to throw money at the problem, which is never enough to solve any problem.

Some thinking is necessary as well.

The column originally appeared on Equitymaster on March 26, 2018.

The Recovery of Bad Loans from Large Borrowers Will Be a Big Challenge for Modi Govt


Earlier this week the Reserve Bank of India released the Financial Stability Report.

Among other things, this report talks about the inability of large borrowers to repay the loans that they have taken on from banks, in particular the public sector banks. The Reserve Bank of India defines a large borrower as a borrower who has taken on a loan of Rs 5 crore or more.

The Indian banking system has been trouble primarily because of the large borrowers and not the retail borrowers. As the Financial Stability Report points out: “Retail loans continued to witness the least stress.

This can be seen from the following chart.

Asset quality in major sectorsChartThe chart makes for a very interesting reading. The retail loans remain the safest form of lending. The gross non-performing assets ratio (or the bad loans ratio) of lending to retail is at 1.8% of the loans given to the sector. Retail loans essentially include home loans, vehicle loans, credit card outstanding, loan against shares, bonds and fixed deposits, and personal loans.

As can be seen from the above chart, the bad loan ratio of retail lending is the least. This explains why 46% of lending carried out by banks between April 2015 and April 2016, has been retail lending. Between April 2014 and April 2015, 32.4% of all lending was retail lending.

Lending to industry is the most risky form of lending. As on March 31, 2016, the bad loans ratio had stood at 11.9%. Over and above this, the stressed advances ratio was at 19.4%. The stressed advances figure is obtained by adding the bad loans to the restructured assets. A restructured asset is essentially a loan where the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

Hence, nearly one fifth of the loans given to industry are in trouble. Given this, it is hardly surprising that banks (in particular public sector banks) do not want to lend to industry. Bank lending to industry between April 2015 and April 2016, remained more or less flat.

Industries which have taken on loans from banks can largely be categorised as large borrowers or borrowers who have taken on a loan of Rs 5 crore or more. And this is where the basic troubles of Indian banks lie.

As the Financial Stability Report points out: “Share of large borrowers’ in total loans increased from 56.8 per cent to 58.0 per cent between September 2015 and March 2016. Their share in GNPA s[gross non-performing assets or bad loans] also increased from 83.4 per cent to 86.4 per cent during the same period.”

What does this mean? This basically means that large borrowers have been given 58% of all loans but they are responsible for 86.4% of the bad loans. In fact, the bad loans ratio of large borrowers stood at 10.6% as on March 31, 2016. As on September 30, 2015, it had stood at 7%. When it comes to public sector banks this ratio had stood at 12.9% as on March 31,2016, for large borrowers.

Hence, the bad loans to big borrowers have been going up. One reason, as I had explained in yesterday’s column is that the Reserve Bank of India(RBI) has been forcing public sector banks to recognise bad loans as bad loans. Up until now, banks had been passing off many bad loans as restructured loans.

Of course, even within the large borrowers there are many categories.

While banks are able to go after the small enterprises which have taken on loans and not in a position to repay them, the same cannot be said about the very large borrowers. As the RBI governor Raghuram Rajan had said in a November 2014 speech, the full force of bank recovery is “felt by the small entrepreneur who does not have the wherewithal to hire expensive lawyers or move the courts, even while the influential promoter once again escapes its rigour.” “The small entrepreneur’s assets are repossessed quickly and sold, extinguishing many a promising business that could do with a little support from bankers,” Rajan had further said on that occasion.

The Financial Stability Report does not give a detailed breakdown of large borrowers, but it does give us a very interesting data point about the top 100 borrowers among the large borrowers.

As the Report points out: “Top 100 large borrowers (in terms of outstanding funded amounts) accounted for 27.9 per cent of credit to all large borrowers…There was a sharp increase in the share of GNPAs [Gross Non-Performing Assets] of top 100 large borrowers in GNPAs of all large borrowers from 3.4 per cent in September 2015 to 22.3 per cent in March 2016.”

What does this mean? The loans given to the top 100 borrowers among the large borrowers constitute for 27.9% of all loans given to large borrowers. As on September 30, 2015, the bad loans of the top 100 borrowers among large borrowers amounted to around 3.4% of bad loans of all large borrowers. By March 31, 2016, this had jumped to 22.3% of bad loans of all large borrowers.

What does this tell us? It tells us very clearly that banks were treating its largest borrowers with kids gloves and not recognising their bad loans as bad loans. This could have possibly been done by restructuring their loans.

Thankfully, this game is now over. And for that both the RBI and the Modi government deserve credit. The bigger challenge now lies ahead. The government as the major owner of public sector banks needs to make sure that these largest of defaulters are made to repay the loans of public sector banks that they have taken on.

Given that, such a thing has rarely happened in the past, it will be interesting to see how the Modi government will go about this. If it can clean this mess up, then the phrase that telephones from the government to the public sector banks have stopped, will acquire a real meaning. Let’s hope for the best.

Watch this space!

The column originally appeared in Vivek Kaul’s Diary on July 1, 2016