August 19, 2016

The Half-Truth of Prudent Private Sector Bank Lending

In this BloombergQuint articlePraveen Chakravarty, Senior Fellow at IDFC Institute writes on the role of public and private sector bank lending in relation to India's bad loan crisis. Excerpts below:


"As of financial year 2014-15, reported non-performing assets (NPA), aka bad loans, of private sector banks were roughly 1.6 percent of their total assets while that of PSU banks were nearly three times worse at 4.5 percent. India’s private sector banks, on average, command a valuation of nearly 2 times their book value in the stock markets. On the other hand, government owned PSU banks are valued significantly below their book value. This discrepancy in NPA levels is the justification for the large valuation gap between private sector and PSU banks...Except, comparing NPAs of private sector banks with PSU banks' is like comparing small oranges and watermelons. This comparison ignores the fact that the private sector banks hardly lend to corporates vis-à-vis PSU banks. It is then natural that NPAs of private sector banks will be much lower than those of PSU banks, since they have largely shunned risky corporate lending... This is certainly not to condone perpetual recapitalisation of PSU banks with taxpayer money for their bad loans sins. But to simplistically argue that PSU banks should merely imitate private banks in their lending behaviour for efficiency and valuation reasons may perhaps be akin to cutting one’s feet to fit into small shoes rather than to buy new, larger shoes, as the Chinese saying goes."


Read the full article here.


x Close Window

Please verify your email address to access this content