Thinking small shows PSU banks way out of NPA mess

The new reality twist in the lending priorities of Indian banks is putting the unfashionables back on top — small entrepreneurs and far...

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The new reality twist in the lending priorities of Indian banks is putting the unfashionables back on top — small entrepreneurs and farmers. With several reputed industrialists defaulting with an alarming consistency, leaving the banks neckdeep in NPAs (non-performing assets), the financial pedestrians are proving not only trustworthy but also profitable.

Aptly titled the priority lending sector by the RBI, the segment registered a whopping 35 per cent growth in the past two years, according to PSU bank mavens. PSU banks have deployed around 43 per cent of their net bank credit in the priority sector in 2002 with the State Bank of Travancore leading the trend with 60.55 per cent. The figures for other leading PSU banks too are well above the RBI’s statutory 40 per cent with PNB’s 45.5 per cent and SBI’s 43 per cent.

So, is it just the NPA factor that drives banks to the small pockets? Not exactly. Bankers attribute the trend to two other factors: first, the sector currently yields better profits than the other ones. Second, the NPA recovery rate for the sector stands at a very encouraging 70%. The NPA comfort is mainly because of the reach factor — loans disbursed here are large in volumes but small in amounts. Also, generally the loans in the agricultural sector get repaid fast thanks to good harvests. Besides, small entrepreneurs are not legally savvy and would rather prefer quick settlements than long litigations. Says N.S. Gujral, Chairman, Punjab and Sindh Bank: ‘‘The farmers are yet to develop the ways and means to con the banks and get away without repaying.’’ And how is lending to the priority sector profitable? For one, the cost of mobilising funds in this sector has been low traditionally. And then, as bank officials explain, with the recent reduction in interest rates, the gap between the lending and deposit rates have gone down in most sectors except the priority sector. Hence, banks can avail of a bigger spread in the priority sector. Industry experts point out that PSU banks get an interest spread of 4 p% and above in priority sector lending as against 2.8 to 3 % in other sectors.

Sums up K.C. Chowdhury, CEO, Indian Banks Association: ‘‘To put it very mildly, priority lending sector is no longer a losing proposition for banks.’’ Small, it seems, is not just beautiful but profitable too.