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UNDERSTANDABLY, THE CONSERVATIVE presiding deity of Mint Street prefers not to hand out praise. But going by the Macroprudential Indicators set out by the RBI in the Report on Trend and Progress of Banking in India 2001-02, commercial banks seem to be doing well. In the second half of 2001-02, capital adequacy has improved, gross and net NPAs are down, and profitability markers are up even though credit concentration (in terms of credit extended to top 20 corporates as a percentage of total credit) is on the higher side. There has been a drop in the ratio of spread to total assets from 2.9 per cent in 2000-01 to 2.6 per cent in 2001-02 while the interest spread per se moved up by 6.8 per cent to Rs 39,454 crore in 2001-02.

Inthe last two years securities trading has kept banks in the profit zone with credit deployment showing marked shifts. Food procurement credit in 2001-02 rose by 35 per cent, less than the 55.7 per cent in 2000-01; non-food credit slipped to 12.5 per cent from 14.4 per cent; and priority sector funding was down at 13.5 per cent against 17.1 per cent. That was compensated by a smart surge in credit flow to wholesale trade and "other sectors" by 14.6 per cent and 21.9 per cent respectively. Housing and personal loans dominated "other sectors" without seemingly generating any wave in the real economy. A rise in housing loans in total credit from 3.8 per cent to 11.6 per cent should have rustled buying interest in consumer durables, in turn ticking off higher cement and steel sales. A lag or a gestation period could explain the puzzling absence of a link-up.

Or, is it that pervasive industrial sickness is stalling any pick-up? Add on the perilous state of co-operatives serving the farm sector and the mood turns blue. As of March 31, 2001, the NPAs on the books of all types of rural co-operatives worsened "both in absolute terms and as a proportion of loans outstanding". The number of urban co-operative banks reporting NPAs fell to 1,342 in 2001-02 from 1,942 the previous year, with the Report adding, ``notwithstanding this difference, the gross NPAs at the aggregate level deteriorated progressively since 1999." The RBI thinks net NPAs "are still high" compared to international norms of around 2 per cent and has argued strongly for full provisioning to match the international practice of 140 per cent. At present, the cumulative provisions against loan losses of public sector banks stand at 42.5 per cent of gross NPAs as of March 31, 2002.

The central bank seems to be in favour of the US system classifying loans into five categories based on payment experience and debtor environment. Bankers will have to be strong on sniffing default probability and they are not equipped to do so now. Only if the economy grows at a hard pace of over 8 per cent can it wade out of the slush and for that banks will have to share a part of rising profits with the public by pruning spreads and inducing investment. In home-loans banks are playing the volume game by trimming interest rates to 9.5 per cent and the same maxim must hold for such critical sectors as industry, farm and infrastructure. Sans the urge to nurse growth, banks cannot remain profitable entities for long.

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