Though banks’ bad debts are now getting enhanced attention, there is little by way of analysis, so much so that we tend to view the issue in extremities — as either an economic problem (caused by distressed conditions) or as a governance problem (excessive borrowings, wilful defaults and poor monitoring by banks).

Unfortunately, data on non-performing assets (NPAs) is inadequate to support these views and we can only hazard guesses. But a cross-sectional analysis of data with the RBI and banks throws up some structural issues, which may have played a role.

Stressed sector loans First, some numbers at the macro level. Of the total GNPAs (gross NPAs) of ₹3,09,000 crore as at end March 2015, the top four banks, SBI, PNB, BOI and ICICI Bank, accounted for over 37 per cent. At an aggregate level, the RBI’s Financial Stability Report says five sectors — infrastructure, mining, iron & steel, textiles and aviation — account for over 50 per cent of the stressed assets. Data from banks’ annual reports bear this out but also throws some other surprises.

Infrastructure and iron & steel are the top contributors across banks (for BOI and PNB, no NPA details available but can be inferred from their stressed exposures). Clearly, both from an asset-liability management as also from a competency perspective, the banks were ill-equipped. The RBI has been trying to remedy this problem through innovative measures such as the 5-25 scheme but this cannot be a long-term solution.

Poor monitoring But it is the other sectors that are puzzling. ICICI has large NPAs from retail and services sectors, which one thought were not doing too badly. So is the case with BOI (21 per cent NPAs from services). SBI and the other banks have NPAs so widely distributed across sectors that it is difficult to generalise economic distress as a cause.

Moreover, the recently released RBI study on Corporate Finance for 2014-15 does not point towards any great economic distress overall. Here are some performance indicators from the study. At an aggregate level, leverage has been moderate (DER of less than 1:1) and interest coverage has been good (at over 3 times), contradicting the theory of excessive corporate leverage. Both sales and profits have registered decent growth.

Admittedly, the data is macro level and individual companies may have fared poorly, but even amongst the four stressed sectors, only infrastructure had high leverage; lower interest coverage ratios were more due to profitability pressures than high debt. Barring iron & steel and infrastructure, the other sectors do not seem to be under any undue stress. Clearly then, it is poor credit appraisal and monitoring that are to be blamed.

Faulty credit delivery Here is where the structural issues come into play. First, the credit delivery mechanism of public sector banks: their loan portfolios are dominated by the old cash-credit/overdraft type financing (about 30 per cent of total credit), an admittedly inefficient means of dispensation that only helps unscrupulous borrowers to divert funds, one of the chief causes of NPAs.

But borrowers love this for the flexibility it provides. This may have served well when banks were providing only working capital loans, but not anymore.

Secondly, the dispersion of credit is highly skewed towards low-value loans. A third of the total credit consists of loans of less than ₹25-50 lakh spread across 1,420 lakh accounts (99 per cent of the loan accounts).

Another third consist of large loans (₹100 crore or more) but spread over just 10,000 accounts. While the large loans are primarily in infrastructure and core industries (where bad debts are more an economic phenomenon), the problem is with the smaller/medium loans widely dispersed across sectors, including those with sizeable NPAs. The latter includes textiles (₹2.10 lakh crore over five lakh accounts), services (₹4.8 lakh crore over 37 lakh accounts) and retail (₹11.4 lakh crore over 49 lakh accounts). Such a large number of accounts renders both monitoring and recovery extremely challenging and expensive.

Also, with such a preponderance of small loans, it would be near impossible to move to debt markets, an often discussed issue in the context of NPAs.

Even larger borrowers prefer bank borrowing for its relative ease of raising money, weak enforcement and operational flexibility (the absence of stringent needs for credit rating and discipline of the market).

Perhaps, market discipline in terms of credit rating and dispersed debt ownership may do the trick. However, until structural issues remain and dominance of public sector banking continues, the system will continue to be exposed to significant bad debt risks.

The writer is an independent consultant

comment COMMENT NOW