Priority sector loans are more credit worthy than corporate

Priority sector loans are no more seen as a socialist burden on banks, instead they have turned out to be more credit worthy than advances to large corporates. During April-December 2016, banks had written off loans worth Rs 35,587 crore to large industries as against write-offs of Rs 32,445 crore of advances in the priority sector.

Also, banks could recover only Rs 16,717 crore from large industries who are in default as against Rs 25,070 crore from the priority sector.

Banks had written off Rs 68,032 crore of bad loans in the first nine months of FY17 — close to 97% of total write-offs in the whole of FY16. Given that the fourth quarter write-offs in FY17 had been significant, the total write-offs in the last three years have crossed Rs 2 lakh crore.

CARE Ratings chief economist Madan Sabnavis said, “After the asset quality review norms were put in place by the RBI, bad loans and provisioning have risen steeply. As banks started realising a part of these bad loans cannot be recovered, they also started writing off more to clean their balance sheets.” He added the situation is a result of bad lending decisions and governance issues among banks, which was supported by the “system”.

In the first nine months of FY2017, scheduled commercial banks (SCBs) wrote off Rs 35,587 core worth of loans to large industries, compared to Rs 6,628 crore written off by lenders to farm loans, Rs 8,106 crore toward MSME loans and Rs 17,711 crore wrote off to the other priority sectors.

A loan write-off does not mean that the borrower is set free as all recovery proceedings continue. A balance sheet write-off indicates that even if the borrower does not repay, the bank has set aside own funds to repay depositors. Similarly, the farm loan waiver announcement by state governments is not included in ‘write-offs’ by banks. “The loan is always there in the books. They are just moved from sub-standard to standard when the government waives and makes good the loan outstanding. Only that amount of the agriculture loan is written off which is not made good by the government,” said a senior public sector banker in charge of priority sector banking.