asset quality of nationalised banks and new private sector banks on priority sector lending

1. SELP Journal of Social Science July - September 2014
Vol . V : Issue. 21 ISSN : 0975-9999 (Print) 2349-1655 (Online)
22
ASSET QUALITY OF NATIONALISED BANKS AND NEW PRIVATE
SECTOR BANKS ON PRIORITY SECTOR LENDING
S.Geetharaj
Ph.D scholar
Research and Development Centre,
Bharathiyar University, Coimbatore
Dr. C. Paramasivan, Ph.D.,
Assistant Professor of Commerce,
Periyar EVRCollege (Autonomous), Tiruchirappalli.
ABSTRACT
Banking sector in India is one of the prevailing and well-organized mechanisms of the
financial system. Indian banking sector consists of old age tradition, which enable to update
modern technology. Structure of the banking system is also well defined and systematically
channelized. When banks were established, it had complicated only traditional services such as
accepting deposits and lending loans. Due to the industrial development in the country, banks
become a never ending system of the economy which is positioned as a centre point of social,
economical and industrial well being. In this regard, banks were nationalized and Government
had given periodical regulation. The banking system has been acting as negotiator to the
Government to implement socio economic programmes. As per the working group of priority
sector, lending recommendation, commercial banks are obliged to lend up to 40% of their total
lending to priority sector.
Key words: RBI, priority sector lending asset quality, commercial banks,
Introduction
The role of central banking in India is
looked by the Reserve Bank of India, which
in 1935 formally took over these
responsibilities from the then Imperial Bank
of India. Reserve Bank was nationalized in
1947 and was given broader powers. In 1969,
14 largest commercial banks were
nationalized followed by six next largest in
1980. But with adoption of economic
liberalization in 1991, private banking was
again allowed.
India has a well developed banking
system. Most of the banks in India were
founded by Indian entrepreneurs and
visionaries in the pre-independence era to
provide financial assistance to traders,
agriculturists and budding Indian
industrialists. The origin of banking in India
can be traced back to the last decades of the
18th century. The General Bank of India and
the Bank of Hindustan, which started in 1786
were the first banks in India. Both the banks
are now defunct. The oldest bank in existence
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SELP Journal of Social Science
ISSN : 0975-9999 (Print) 2349-1655 (Online)
Vol V : Issue. 21
July - September 2014

2. SELP Journal of Social Science July - September 2014
Vol . V : Issue. 21 ISSN : 0975-9999 (Print) 2349-1655 (Online)
23
in India at the moment is the State Bank of
India. The State Bank of India came into
existence in 1806. At that time it was known
as the Bank of Calcutta. SBI is presently the
largest commercial bank in the country.
The commercial banking structure in India
consists of Scheduled Commercial Banks and
Unscheduled Banks. Scheduled commercial
Banks constitute those banks, which have
been included in the Second Schedule of
Reserve Bank of India (RBI) Act, 1934. RBI
includes only those banks in this schedule,
which satisfy the criteria laid down vide
section 42 (6) (a) of the Act.
Asset quality in commercial banks
According to ASSOCHAM report, the
asset quality of the public as well as private
sector banks has improved remarkably on
back of the strong economic growth and
prudent provision policies during last
financial year 2011-12 even as the period saw
successive hikes in interest rates and robust
credit growth. The asset quality of the
banking system deteriorated significantly
during 2012-13 and there was an increase in
the total stressed assets in the banking system,
that is NPAs plus restructured assets, the RBI
said. As the end of March 2013, the gross
NPAs stood Rs. 1,94,000 crore, according to
the RBI. Public sector banks had highest
amount of bad loans at Rs. 1,65,000 crore
followed by private sector banks at Rs. 21,000
crore and foreign bank at Rs. 7,900 crore.
Hence there is a need to understand the status
of the asset quality with respect to priority
sector lending by banks.
Review of literature
Review of literature encompasses the
conceptual back ground and how the earlier
studies were made and also help to meet the
research gap. There are a large number of
studies on the causes of NPAs in Indian
banking sector. However, some of the studies
relating to NPAs are mentioned to pinpoint
the importance of the subject.
Rangarajan.C (1991) has pointed out that
improving the quality of loan assets is the
true test of improved efficiency of banking
system.
Nachiket Mor and Bhavna Sharma,
(2002) highlighted some major micro-level
issues that were believed to be the root of
why unsustainable performance levels are
being observed within banks. It was argued
that unless the micro level issues would be
dealt with, even after the systemic issues
being resolved, the problem of NPAs or other
failures of the intermediation process may
resurface with greater intensity.
Gourav Vallabh, Anoop Bhatia, and
Saurabh Mishra, (2004) in their article,
mention the that NPA decreases with
increased priority sector loans to total loans,
and public sector loans were affected by
macro economic variables at large. But this
research did not take interest rates, inflation
rate in consideration.
Ramasastri.S and Unnikrishnan N. K.
(2005) said that, NPAs are largely the fallout
of banks’ activities with regard to advances,
both at the management and implementation
levels (including overall controls by the top
management), the credit appraisal system,
monitoring of end-usage of funds. It also
depends on the overall economic
environment, the business cycle and the legal
environment for recovery of defaulted loans.
Balasubramaniam.C.S (2009) observed
from the above analysis, the level of NPA’s
is high with all banks currently and would

3. SELP Journal of Social Science July - September 2014
Vol . V : Issue. 21 ISSN : 0975-9999 (Print) 2349-1655 (Online)
24
be expected to bring down their NPA. This
can be achieved by good credit appraisal
procedures, effective internal control systems
along with their efforts to improve asset
quality in their balance sheets.
Jaynal Ud-Din Ahmed (2010) observed
that the mounting NPA’s of banks affect their
financial health in terms of profitability,
liquidity and economics of scale of operation.
Banks have to take timely action against
degradation of performing assets.
Rajveer Rawlin , Shwetha M Sharan &
Pradeep B Lakshmipathy (2012), Noted As
NPA’s are a direct reflection of asset quality,
estimating them can prove useful in overall
credit management. We attempt to model the
non performing assets at one of India’s
midsized banks as a function of the loans
advanced by the bank. We obtained
statistically significant linear and non linear
models to accomplish the above. A cubic
model provided the best fit for net NPA
percentage and an S Curve model provided
the best fit for the Gross NPA percentages as
a function of advances, thereby helping us
arrive at NPA estimates.
Rama Prasad .M & Ramachandra Reddy
.B (2012), studied, The problem of NPAs has
been a major issue for the banking industry.
The RBI which is the apex body for
controlling level of non-performing assets
have been giving guidelines and getting
norms for the banks in order to control the
incidents of faults. Reduction of NPAs in
banking sector should be treated as national
priority item to make the Indian Banking
system more strong, vibrant and geared to
meet the challenges of globalization.
Mohan Kumar, *Govind Singh (2012),
observed It is evident from this research paper
that the problem of NPAs in India has not yet
reached in the critical stage that has reached
in most countries. Industry related loan
accounts which are near about 42% of total
loans, and 20% of the industry-related loan
assets can be considered as problematic.
Aggarwal, S., & Mittal, P. (2012):
According to the study, the major reasons for
NPAs include improper selection of
borrowers’ activities, weak credit appraisal
system, industrial problems, inefficient
management, slackness in credit
management and monitoring, lack of proper
follow-up, recessions and natural calamities
and other uncertainties.
Suresh Patidar ( 2012) NPA is an
important factor, which affects the
performance of the banks. So it is very
important to check it, from time to time and
try to minimize it in order to get increasing
returns. The reasons for growing Advances
in Priority Sector are the Norms given by
RBI, where banks need to compulsorily
invest in these sectors. It is also clear that
there is significant difference between NPA
of Nationalised Banks, with that of SBI &
Associates, New Private Banks and Old
Private Banks.
Shalini H. S.( 2013), Finally we can
conclude that the bankers can avoid
sanctioning loans to the non creditworthy
borrowers by adopting certain measures.
They are careful appraisal of the project
which involves checking the economic
viability of the project. A banker must
consider the return on investment on a
proposed project. If the calculated return is
sufficiently higher than the credit amount he
can sanction the loan.
Shukla . N. K. &. Mytraye.M (2013),
Effective and regular follow-up of the end

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Vol . V : Issue. 21 ISSN : 0975-9999 (Print) 2349-1655 (Online)
25
use of the funds sanctioned is required to
ascertain any embezzlement or diversion of
funds. This process can be undertaken every
quarter so that any account converting to NPA
can be properly accounted for. A healthy
Banker-Borrower relationship should be
developed. Many instances have been
reported about forceful recovery by the banks,
which is against corporate ethics. Debt
recovery will be much easier in a congenial
environment
Priority sector lending
Priority sector lending is one of the
milestones to the social banking process,
which helps to promote the socio economic
development of the country. Priority sector
refers to those sectors of the economy, which
may not get timely and adequate credit in the
absence of this special dispensation.
Typically, these are small value loans to
farmers for agriculture and allied activities,
micro and small enterprises, poor people for
housing, students for education and other
low-income groups and weaker sections.
Priority Sector includes Agriculture, Micro,
and Small Enterprises, Education, Housing,
Export Credit and Others. While providing
liberal lending to the priority sectors, banks
will face certain problems like poor recovery
performance, which leads to affect the assets
quality of the commercial banks, particularly
public sector banks. In the year 2008-09,
Ministry of Finance announced a onetime
waiver of all agricultural debt up to Rs.70,
000 crores. It heavily affects the assets quality
of the commercial banks due to too many risk
factors.
Asset quality is the key factor of the
financial soundness of the banks with closely
associated with the profitability, liquidity and
solvency position. Non-performing assets are
rising due to more lending to priority sector
which resulted to affecting the earning
capacity of the banks. Hence, the banks have
been very cautious while lending to these
sectors. Restriction and compulsion to
priority sector lending are more than to the
private sectors. Therefore, the NPA passion
will be much better in private sector banks.
In this regard, there is a need to understand
the impact of assets quality on priority sector
lending of the banks, which is a emerging
study in the contemporary environment. This
study enables to make a clear presentation
regarding the trend of the Public Sector
Lending and its impact on asset quality.
Conclusion
According to global credit ratings agency
S&P, Indian banks would continue to face
asset quality troubles till March 2015 and the
gross non- performing assets (NPAs) in the
system will grow to 4.4 per cent by then.
Hence, asset quality becomes a major
parameter which measures the efficiency of
the banking operation. In this regard, this
would be very useful to the bankers to set
the benchmark and control over the non-
performing assets in their records.
References
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Performing Asset: Comparative Position of
Public and Private Sector Banks in
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assets and profitability of Commercial banks
in India: assessment and emerging issues,
ABHINAV National Monthly Refereed
Journal of Research in Commerce &
Management, Volume No.1, Issue NO.7

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Vol . V : Issue. 21 ISSN : 0975-9999 (Print) 2349-1655 (Online)
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