Indian banks had gross non-performing assets (GNPAs) of 2.9% at the end of March 2012. The same has gone up almost 40% in the last 2 years. That is not all. Critically restructured assets and NPAs are expected to rise further by the end of FY13. As per Crisil estimates, gross NPAs are likely to touch 3.5% by March 2013. The worries over asset quality are more so in the case of public sector banks (PSBs). During FY12, gross NPAs of PSBs grew by Rs 390 bn compared to only Rs 5 bn in the case of private sector entities. One reason could be that the the PSBs account for around 80% of the banking sector's credit. Two, the major sectors that reported irrecoverable loans are real estate, textile, aviation and infrastructure (specifically, power and telecom), in addition to priority sector loans. Again, PSUs are the major lenders to these. In cases like textile, aviation and power the lending by PSU banks were despite poor fundamentals of the sector. Interestingly, even when it cam e to priority sector lending it was the PSUs that took the hit. Join the dots together and we can understand the reluctance of private and foreign banks to lend more to priority sector.

The RBI on its part is focusing on priority sector lending to encourage banks to undertake more direct lending to farmers. It has even extended the scope of such loans to include cooperatives of farmers and loans to government agencies for construction of dwelling units and slum rehabilitation. But there is nothing that suggests that such loans will be serviced well. Under priority sector norms, banks need to set aside 40% of their total credit to agriculture, exports and micro lending. Little wonder that the non-PSU banking entities prefer to invest in NABARD bonds rather than lend to priority sector. RBI would do well to ensure quality in priority sector lending before expecting rise in volume.