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Business News/ Industry / Bad loan problem worse for small, district-level lenders, says Nabard
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Bad loan problem worse for small, district-level lenders, says Nabard

Gross NPAs at district central cooperative banks rose to 10.7% of their total loans in FY14 from 9.8% a year ago

A file photo of Nabard headquarters in Mumbai. Photo: MintPremium
A file photo of Nabard headquarters in Mumbai. Photo: Mint

Mumbai: The pile-up of bad loans across the banking system is not restricted to commercial banks; it may, in fact, be far more extreme in the case of smaller entities that lend to agriculture and allied activities, data from the National Bank for Agriculture and Rural Development (Nabard) show.

Gross non-performing assets (NPAs) at district central cooperative banks (DCCBs), the smallest units of the Indian banking system, surged to 10.7% of their total loans at the end of fiscal 2014, according to Nabard, the regulatory agency for the rural cooperative banking system. That was up from 9.8% in fiscal 2013.

Two years of sub-5% growth in the economy, Asia’s third largest, have taken their toll on commercial banks, where gross NPA of 40 listed banks stood at 2.42 trillion as on 31 March 2014, up 34.4% from 1.8 trillion a year ago. Slower growth and stalled projects crimped cash flows and made it difficult for corporate borrowers to repay their debts.

In the case of smaller lenders like DCCBs, one-off factors such as drought tend to have a negative impact, but their bad-loan problem has persisted at least for three years; gross NPAs in fiscal 2012 were also in double digits at 10.2%.

The persistent trend suggests that operational issues like weak governance and delays in adopting technology are hurting the functioning of these banks. Outstanding advances of district-level banks were nearly 2 trillion at the end of FY14, up almost 12% from the previous year.

“The NPAs are higher at the DCCB level because they are easily affected by climatic changes and other agricultural yield-related issues. If the recoveries at the lowest levels are bad, then they are bound to show higher bad loans. Also, the sociopolitical dynamics in these areas affect the recovery efforts by the banks," Nabard chairman Harsh Kumar Bhanwala said in an interview on 15 September.

The performance of these banks is not uniform across the country. States such as Bihar, Chhattisgarh, Jammu and Kashmir, Jharkhand, Maharashtra, Madhya Pradesh, Odisha, Uttar Pradesh, Uttarakhand and West Bengal have the worst performing DCCBs, show the disaggregated data.

The gross NPAs of DCCBs in these states stand above 10%, with Bihar recording the highest gross NPA ratio of over 35% as of 31 March 2013. Nabard could not give state-wise information as of 31 March 2014 as the numbers have not been audited yet.

“In Maharashtra, there is a lot of interlocking between cooperative banks and cooperative factories such as sugar and cotton. This has resulted in large defaults in the cooperative banks of the state," said Usha Thorat, a former deputy governor of the Reserve Bank of India (RBI).

“The other states where the NPAs are high, there are geographical and seasonal risks. Since these banks primarily lend to agriculture requirements, any changes with respect to productivity in the agricultural sector will have a big impact on these banks," Thorat added.

The rise in NPAs in these states is being reported relatively soon after the United Progressive Alliance government announced an agricultural debt waiver in 2008, Thorat pointed out.

According to Nabard, state cooperative banks and DCCBs together received 18,282 crore of the debt waiver scheme.

“Despite the debt waiver, these banks have accumulated large bad loans, which is probably the result of poor lending practices followed by them," Thorat added.

State governments hold roughly 25% stake in DCCBs and state cooperative banks in India and this is part of the problem faced by these banks while trying to recover bad loans.

“Frequent resort by state governments to stop these banks from effective legal efforts is a dampener. There needs to be a social and political awakening that these institutions are serving a purpose and recoveries are important to them," said Bhanwala.

At the end of fiscal year 2013, DCCBs reported a recovery rate of 79%.

Corporate governance practices followed by the banks also remain a matter of concern since the boards tend to focus on daily administrative issues rather than growth and developmental requirements of the bank, Bhanwala added.

To be sure, the regulator is now exercising far greater control over the management and operations of these banks. Nabard is trying to ensure strict compliance with the “fit and proper" criteria for the appointment of chief executive officers at these banks.

Guidelines for the appointments have been in place since 2008. Nabard is also of the view that a nominee of the depositors must be part of the bank board, which is not the case at present, Bhanwala said.

To be sure, while district-level cooperative banks are struggling to improve their performance, state-level cooperatives banks, which are larger units that lend to DCCBs, are doing much better. Gross NPA ratio across all state cooperative banks stood at 4.7% as of 31 March 2014, compared with 6% a year ago.

The recovery rates of state cooperative banks were also higher at 95%. Total advances of state cooperatives at the end of FY14 stood at around 1 trillion, up nearly 12% from 92,369 crore reported a year ago.

Various village-level credit societies come together to form DCCBs, while DCCBs are the members of state cooperative banks. At present there are 370 DCCBs across 19 states in India, besides 31 state cooperative banks.

“In case of state cooperatives, better technology and more resources help them bolster their recovery procedures and manage their bad loans in an efficient manner. DCCBs often fall short in these areas," Bhanwala said.

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Published: 28 Sep 2014, 10:30 PM IST
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