Indian Economy, 5th edition (60 page)

Priority Sector Lending

All Indian banks have to follow the compulsory target of priority sector lending (PSL). The priority sector in India are at present the sectors—agriculture, small and medium enterprises (SMEs), road and water transport, retail trade, small business, small housing loans (not more than Rs. 10 lakhs), software industries, Self Help Groups (SHGs), agro-processing, small and marginal farmers, artisans, distressed urban poor and indebted non-institutional debtors besides the SCs, STs and other weaker sections of society.
28
The 5 minorities, namely the
Muslims, Christians, Sikhs, Buddhists
and
Parsis
have been included under the PSL.
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The PSL target must be met by the banks operating in India in the following way:

(i)
Indian Banks
need to lend 40 per cent to the priority sector every year (public sector as well as private sector banks, both) of their total lending. There is a sub-target also—18 per cent of the total lending must go to agriculture and 10 per cent
of the total lending or 25 per cent of the priority sector lending (whichever be higher) must be lent out to the weaker sections. Other areas of the priority sector to be covered in the left amount i.e. 12 per cent of the total lending.

(ii)
Foreign Banks
have to fulfill only 32 per cent PSL target which has sub-targets for the exports (12 per cent) and small and medium enterprises (10 per cent). It means they need to disburse other areas of the PSL from the remaining 10 per cent of their total lending (
lesser burden
).

The
c
ommittee on
f
inancial System (CFS, 1991) had suggested to immediately cut it down to 10 per cent for all banks and completely phasing out of this policy for the betterment of the banking industry in particular and the economy in general. The committee also suggested to shuffle the sectors covered under PSL every three years. No follow up has been done from the government except cutting down PSL target for the foreign banks from 40 per cent to 32 per cent. Meanwhile some new areas have been added to the PSL.

Revision in PSL

The Reserve Bank of India (RBI) panel on priority sector lending on 21st Feb. 2012 proposed that the target (priority sector) for foreign banks to be increased to 40 per cent of net bank credit from the current level of 32 per cent with sub-targets of 15 per cent for exports and 15 per cent for the Medium and Small Enterprises (MSE) sector, within which 7 per cent may be earmarked for micro enterprises. The target of domestic scheduled commercial banks for lending to the priority sector to be retained at 40 per cent of net bank credit. The
Nair Committee,
(under the Chairmanship of M. V. Nair, Chairman, Union Bank of India), has re-examined the existing classification and suggested revised guidelines with regard to priority sector lending and related issues. Major suggestions by the Committee are as given below:

(i)
The committee suggested that the sector
‘agriculture and allied activities’
may be a composite sector within the priority sector, by doing away with the distinction between
direct
and
indirect
agriculture. However, the targets for agriculture and allied activities would be at 18 per cent.

(ii)
A
sub-target for
small
and
marginal farmers
within agriculture and allied activities is recommended, equivalent to 9 per cent, which would be achieved in stages by 2015-16.

(iii)
The
MSE
sector may continue to be under the priority sector. Within the MSE sector, a sub-target for micro enterprises is recommended, equivalent to 7 per cent, which would also be achieved in stages by 2013-14.

(iv)
The loans to
housing
sector may continue to be under the priority sector. Loans for construction or purchase of one dwelling unit per individual up to Rs.25 lakh; loans up to Rs.2 lakh in rural and semi urban areas and up to Rs.5 lakh in other centres for repair of damaged dwelling units may be granted under the priority sector.

(v)
To encourage construction of dwelling units for economically weaker sections and low income groups, housing loans granted to these individuals may be included in the weaker sections category.

(vi)
All loans to
women
under the priority sector may also be counted under loans to weaker sections.

(vii)
The loans to
education
sector may continue to be under the priority sector. The limit under the priority sector for loans for studies in India may be increased to Rs.15 lakh and Rs.25 lakh in case of studies abroad, from the existing limit of Rs.10 lakh and Rs.20 lakh, respectively.

(viii)
The Committee has also recommended allowing non-tradable priority sector lending certificates on a pilot basis with domestic scheduled commercial banks, foreign banks and regional rural banks as market players.

The Menace of NPAs

Non-Performing Assets (NPAs) are bad debts of banks/Financial Institutions defined as follows w.e.f. March 31, 2001:
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An advance of banks/FIs where—

(i)
interest and/or installment or principal remains overdue for a period more than 180 days in respect of a
term loan:

(ii)
interest and/or installment or principal remains overdue for two harvest seasons but for a period not exceeding two-and-a-half years in the case of
agricultural loans.
The NPAs were classified into three types:

(a)
Sub-standard:
remaining NPAs for less than or equal to 18 months;

(b)
Doubtful :
remaining NPAs for more than 18 months; and

(c)
Loss assets :
where the loss has been identified by the bank or internal/external auditors or the RBI inspection but the amount has not been written off.

As per the All Indian Bank Employees Association (AIBEA), the premier union representing bank workers in India, the menace of NPAs has reached the following levels by March 31, 2001:
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•
The NPAs of borrowers account owing more than ‘1 crore each to banks/FIs added to
`
80,574 crores

•
if interests are also calculated it becomes over
`
1,50,000 crores.

•
Nearly 80 per cent of it is owed to the PSBs (public sector banks).

New Steps to Check NPAs

As per the
Economic Survey 2012-13
, though Indian banks remained well-capitalized, concerns regarding growing NPAs persisted – the present situation of the NPAs of the Indian banks is as given below:

•
Overall NPAs of the banking sector increased from 2.36 per cent of total credit advanced in March 2011 to
3.57
per cent of total credit advanced in September 2012. While there has been an across-the-board increase in NPAs, the increase has been
particularly sharp
for the industry and infrastructure sectors, with NPAs as a percentage of credit advanced increasing from 1.91 per cent in March 2011 to 3.44 per cent as in September 2012. Sectors particularly under stress include textiles, chemicals, iron and steel, food processing, construction, and telecommunications.

•
As per RBI data, gross NPAs
(GNPAs)
of PSBs (Public Sector Banks) have shown a rising trend during the last three years from Rs. 59,972 crore ( March, 2010) to Rs. 1,44,437 crore (September, 2012). As a percentage of credit advanced, NPAs
(i.e Net NPAs)
were at a level of
4.01
per cent in September 2012 compared to 2.09 per cent in 2008-09.

The main
reasons
for increase in NPAs of banks are –

i.
Switchover to system-based identification of NPAs by PSBs;

ii.
Current macroeconomic situation in the country;

iii.
Increased interest rates in the recent past;

iv.
Lower economic growth; and

v.
Aggressive lending by banks in the past, especially during good times.

Some recent
initiatives
taken by the government to address the rising NPAs include –

a.
Appointment of nodal officers in banks for recovery at their head offices/ zonal offices/ for each Debts Recovery Tribunal (DRT);

b.
Thrust on recovery of loss assets by banks;

c.
Close watch on NPAs by picking up early warning signals and ensuring timely corrective steps by banks;

d.
Directing the state-level Bankers’ Committee to be proactive in resolving issues with the state governments; and

e.
Designating asset reconstruction companies (ARCs) resolution agents of banks.

The
RBI
has also announced the following remedial measures –

a.
Restructured standard account provisioning raised from the existing 2 per cent to 2.75 per pent;

b.
The sanction of fresh loans/ad-hoc loans from 1st Jan 2013 will be made on the basis of sharing of information among banks;

c.
Banks will conduct sector- /activity-wise analysis of NPAs;

d.
Banks will put in place a robust mechanism for early detection of sign of distress, amendments in recovery laws, and strengthening of credit appraisal and post credit monitoring.

SARFAESI Act, 2002

GoI finally cracked down on the
wilful defaulters
by passing the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002
.

The Act gives far reaching powers to the banks/FIs concering NPAs:

1.
Banks/FIs having 75 per cent of the dues owed by the borrower can collectively proceed on the following in the event of the account becoming NPA:

(A)
Issue notice of default to borrowers asking to clear dues within 60 days.

(B)
On the borrower’s failure to repay:

(i)
Take possession of security and/or

(ii)
take over the management of the borrowing concern and/or

(iii)
appoint a person to manage the concern.

(C)
If the case is already before the BIFR, the proceedings can be stalled if banks/FIs having 75 per cent share in the dues have taken any steps to recover the dues under the provisions of the ordinance.

2.
The banks/FIs can also sell the security to a securitisation or Asset Reconstruction Company (ARC), estd. under the provisions of the Ordinance [The ARC is sought to be set up on the lines similar to the USA, few years ago.]

Debt Recovery Tribunals (DRTs)

Earlier, the Government had set up Debt Recovery Tribunals (DRTs) in 1993 which failed to bring about the desired change in the scenario due to
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—

(i)
DRTs are also clogged up with many cases and the judgement takes time (many months, if not years):

(ii)
The sale of property can be made only through court appointed officials, adding delays;

(iii)
The tribunals cannot take up the medium- or large-sized firms if they are under consideration of the BIFR due to sickness.

The praiseworthy step regarding recovery of the NPAs and allowing the setting up of the Asset Reconstruction Companies (ARCs) had an impact. Improved industrial climate and new options available to banks for dealing with bad loans helped in recovering a substantial amount of NPAs. The NPAs of scheduled commercial banks (SCBs) were at 2.3 per cent of total assets at end December 2011.
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Capital Adequacy Ratio

At first sight bank is a business or industry a segment of the service sector in any economy. But the failure of a bank may have far greater damaging impact on an economy than any other kind of business or commercial activity. Basically, modern economies are heavily dependent on banks today than in the past—banks are today called the backbone of economies. Healthy functioning of banks is today essential for the proper functioning of an economy. As credit creation (
i.e. loan disbursals
) of banks are highly risky business, the depositors’ money depends on the banks’ quality of lending. More importantly, the whole payment system, public as well as private, depends on banks. A bank’s failure has the potential of creating chaos in an economy. This is why governments of the world pay special attention to the regulatory aspects of the banks. Every regulatory provision for banks tries to achieve a simple equation i.e.
“how the banks should maximise their credit creation by minimising the risk and continue functioning permanently”.
In the banking business risks are always there and cannot be made ‘zero’—as any loan forwarded to any individual or firm (irrespective of their credit-worthiness) has the risk of turning out to be a bad debt (
i.e. NPA in India
)—the probability of this being 50 per cent. But banks must function so that economies can function. Finally, the central banks of the world started devising tools to minimise the risks of banking at
one hand
and providing cushions (shock-absorbers) to the banks at the
other hand
so that banks do not go bust (i.e. shut down after becoming bankrupt). Providing cushion/shock-absorbers to banks has seen three major developments
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:

(i)
The provision of keeping a
cash ratio
of total deposits mobilised by the banks (known as the CRR in India);

(ii)
t
he provision of maintaining some assets of the deposits mobilised by the banks with the banks themselves in
non-cash form
(known as the SLR in India); and