An increase in NPAs is normally attributed to factors such as ownership, management, credit assessment quality, economic downturn, sectoral performance, wilful default or just bad luck. Is it possible to separate the causes that are macro in nature from the banks-specific ones?
The accompanying table provides information on the NPA ratios of various banks for FY13 in different sectors based on their annual reports. The focus is on 21 public sector banks, though 5 new private banks have also been included for the purpose of comparison. The PSBs exclude the SBI associate banks as information is not uniformly available for them. It is assumed that the analysis will be the same.
Agriculture has highest NPA ratio for 9 of the 21 banks. The second-highest was industry with 6, followed by personal loans and services with 3 each. Four banks had agriculture as the second-largest sector with high NPAs though services led with 10 banks, followed by industry with 6 and personal loans with 3 (adding up to 23, as two had the same level of NPAs in two sectors).
What conclusions may be drawn? First, personal loans appear to be a safe avenue for lending as there is rarely a systemic risk which spreads based on non–performance of a sector like agriculture or industry. As it is well spread across individuals and the ability of an individual to service the loan is not linked with that of any general parameter, the linkage is dispersed. However, the extent to which some banks have very high ratios in this segment such as Allahabad Bank, Bank of Baroda and the Oriental Bank of Commerce, there is a need to examine which segment within this sector has not performed so that prompt action can be taken. Normally, this sector has lower delinquencies but there could be a concentration in the home loan segment where high interest rates could have affected the repayment capacity.
Second, agriculture is clearly the most vulnerable sector generating NPAs.While it is puzzling as to why there should be a variation in these ratios across banks, it can be partly explained by looking at the areas where these loans are given, which would be crop-specific. However, at a more generalised level, the moral hazard in such loans is there is a propensity not to repay in the hope that these loans would be written off. In fact, even among the private banks considered here, NPAs