Changing dynamics of Indian banking

One constant feature of banks' balance sheets over the years - in good times and bad - is the high level of bad loans in the agriculture sector. Can anything be done about it?

- TAMAL BANDYOPADHYAY

Indian banks are in the pink of health. The industry has never had such a good time when it comes to the quality of its assets. Gross bad loans non-performing assets (NPAs) in banking parlance dropped to a 12-year low of 2.8 per cent in FY24. After setting aside money for bad loans, net NPAs are at a historic low of 0.6 per cent.

In the second half of the last decade, some banks were in the ICU. Doctor Raghuram Rajan treated the sector; regular health check-ups were conducted at the diagnostic centre called the Reserve Bank of India (RBI); former finance minister Arun Jaitley provided the right nourishment (in the form of the biggest-ever recapitalisation funds for public sector banks) to revive the sector; and dietician Urjit Patel prescribed the big no-nos for banks to maintain their health.

Let's look at how the scene has evolved in the past four years of the current decade since the Covid-19 pandemic hit the world. Excuse me for resorting to too much data.

The gross NPAs of the banking system were 8.5 per cent in March 2020 (and even higher at 9.3 per cent in September 2019), and net NPAs were 3 per cent (down from 3.7 per cent). At its peak in the current cycle, gross NPAs were 11.6 per cent in March 2018, while net NPAs were 6.1 per cent.

How have the banks' bad exposures to different sectors - such as industry, agriculture, services, and retail evolved over the past few years? In March 2020, banks' gross NPAs for loans to industry were 14.2 per cent (lower than 20.5 per cent in September 2018), agriculture loans were 10.1 per cent, services 7.2 per cent, and retail 2 per cent.

If we look at overall stressed loans, the figures were slightly higher. For industry, it was 14.8 per cent; for agriculture, 10.3 per cent; services, 7.6 per cent; and retail, 2.1 per cent. Stressed loans include those already branded as bad assets or NPAs and other loans that have the potential to turn bad.