Free Reports

Narrow Banking: Public Sector Banks Should Not Be Lending to Corporates

Feb 21, 2018


One of the good things to have happened because of the jeweller Nirav Modi's fraud of $1.8 billion, is the focus that the mainstream media has been giving to public sector banks.

News channels which did not have any discussion on the bad loans of Indian public sector banks touching almost Rs 7,00,000 crore, are now staging fist fights with the prospect of Rs 11,400 crore ($1.8 billion in rupees) being further added to the overall bad loans of these banks.

Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more.

So what's the problem facing public sector banks? It's clearly not the aam aadmi, i.e. individuals who take on loans from banks, or what in banking parlance is referred to as the retail loan business. That has been working just fine. The aam aadmi has been taking loans and paying his EMIs on time.

The problem is with the fat cats, the seths, the big businessmen, the corporates, who have made a habit of taking bank loans and not repaying them. Nirav Modi is just another addition to that long list.

Take a look at Table 1. It basically lists corporate bad loans as a proportion of corporate lending, for public sector banks other than the State Bank of India. It also lists out overall bad loans of these banks.

Table 1:
Year Corporate bad loans (in %) Total bad loans (in %)
2012-2013 3.61% 3.24%
2013-2014 4.97% 4.09%
2014-2015 6.12% 5.26%
2015-2016 14.96% 10.69%
2016-2017 19.13% 12.95%
Source: Author calculations on data from Rajya Sabha Unstarred Question No: 278 and

As can be seen from Table 1, by 2016-2017, nearly one out of every five rupees of corporate loans that India's government owned banks had given (except the State Bank of India) had been defaulted on. For the State Bank of India, the

While Table 1 tells us what the problem is, it does not show us the enormity of the problem. For that we need to look at data in a slightly different way. The question that we need an answer to is: what portion of the total bad loans do corporate bad loans make up for?

As of March 31, 2017, corporate bad loans made up for nearly 69% of overall bad loans of public sector banks. Take a look at Table 2. It basically lists out, the total corporate bad loans along with the total bad loans, of each public sector bank, for 2016-2017.

Table 2:
Name of the bank Corporate bad loans (in Rs crore) Total bad loans (in Rs crore) Corporate bad loans as a proportion of total bad loans
Allahabad Bank 17,198 20,688 83.13%
Andhra Bank 14,237 17,670 80.57%
Bank of Baroda 21,153 42,719 49.52%
Bank of India 32,786 52,045 63.00%
Bank of Maharashtra 11,904 17,189 69.25%
Bharatiya Mahila Bank Ltd. 50 54.99 90.93%
Canara Bank 22,418 34,202 65.55%
Central Bank of India 19,323 27,251 70.91%
Corporation Bank 13,063 17,045 76.64%
Dena Bank 8,395 12,619 66.53%
IDBI Bank Limited 33,070 44,753 73.90%
Indian Bank 7,691 9,865 77.96%
Indian Overseas Bank 23,081 35,098 65.76%
Oriental Bank of Commerce 18,466 22,859 80.78%
Punjab & Sind Bank 4,094 6,298 65.01%
Punjab National Bank 38,441 55,370 69.43%
Syndicate Bank 9,815 17,609 55.74%
UCO Bank 15,216 22,541 67.50%
Union Bank of India 21,357 33,712 63.35%
United Bank of India 7,683 10,952 70.15%
Vijaya Bank 4,914 6,382 77.00%
State Bank of India* 80,079 1,12,343 71.28%
*large corporates plus mid corporates
Source: Indian Banks' Association, Analyst Presentation SBI, March 2017 and Rajya Sabha
Unstarred Question No: 278, July 2017

Table 2 does not paint a very pretty picture. As can be seen, a bulk of the bad loans of public sector banks are loans which haven't been repaid by corporates. Corporate bad loans account for more than three fourth of the bad loans of many public sector banks.

Given the massive amount of bad loans of public sector banks, the banks need to regularly keep writing off loans. Between 2004-2005 and September 30, 2017, the public sector banks have written off loans worth Rs 3,81,549 crore, with a bulk of this amount having been written off in recent years. The loans are written off against the capital of the bank.

With a very low rate of recovery of bad loans, this means that the government, as the major owner of public sector banks, has had to keep infusing fresh capital into these banks to keep them going. From 2007-2008 onwards and by the end of 2017-2018 (the current financial year), the government would have infused a total capital of Rs 2,19,718 crore, to keep the public sector banks going.

Long story short-public sector banks keep sucking taxpayer money to basically finance Indian corporates who default on the loans. This needs to stop. As we have been advocating for a while, the government does not need to own 21 public sector banks, as it currently does. Nevertheless, given that privatisation is a difficult option in the Indian scenario, what is the other way out? (Dear Reader, here is another solution!)

The other way out is narrow banking. Public sector banks other than the top 5 public sector banks, should not be lending to corporates, given that the defaults on corporate loans make up for the bulk of bad loans.

This is not to blame the loan officers and managers in public sector banks, who commission these loans. This is more on account of the nexus that prevails between politicians and businessmen in this country and because of which the public sector banks over the years have been forced to give loans to businessmen and businesses, not in the habit of repaying. One way to break this nexus is to ensure that the government gets out of the banking business, lock, stock and barrel. There is another way as well.

Banks finance their loans by raising deposits, which typically tend to have a fixed tenure of one to five years. With these deposits, banks, at times, finance corporate projects which have a term of more than a decade. There is a clear mismatch here. Long term financing needs specialised project finance institutions. It needs a stronger corporate bond market. It needs pension funds which have access to money for long tenures and are willing to invest money for the long term.

Public sector banks should not be in the long term corporate lending business. Neither is the solution to replace them easy nor can it be implemented overnight. Having said that, most problems do not have readymade solutions. Solutions also need to be built into place. The Nirav Modi fraud has given the Narendra Modi government an opportunity to set things right at India's public sector banks. It can either privatise them or get them out of lending to corporates.

Warm Regards,

Vivek Kaul
Editor, Vivek Kaul's Diary

PS: Any mutual fund can keep its head above the Sensex line. And every one more or less does. But no mutual fund manager can pick out small caps that consistently turn multi baggers - and build real wealth. But one person can... find out how. Click here.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

Stocks Are Headed for a Thunderstorm March 24, 2018
Bill tries to explain how trade war with China could turn bull market into a bear.
How the Feds Turned West Baltimore Into a Sh*thole March 23, 2018
Bill takes a trip down memory lane, to show how the Fed's apathy has turned Baltimore to the way it is now.
Cash is Back: Ill-Effects of Demonetisation are Finally Going Away March 22, 2018
The currency in circulation at the end of this financial year is expected to touch 11.1% of the GDP.
All Aboard the Bankruptcy Express March 22, 2018
U.S. consumer debt has exploded higher over the past 10 years.

Equitymaster requests your view! Post a comment on "Narrow Banking: Public Sector Banks Should Not Be Lending to Corporates". Click here!

2 Responses to "Narrow Banking: Public Sector Banks Should Not Be Lending to Corporates"


Feb 23, 2018

Is privatisation of PSBs the panacea for all evils?.Is it not the category of borrowers from the private sector, the largest defaulters to the Public Sector Banks?.The article would have been meaningful if an analysis would have been done and incorporated in the article. The author needs to undertake an analysis of how many private sector Banks have collapsed during the last three to four decades.How many such private sector Banks have been merged with PSBs vis a vis the private sector Banks.The PSBs have been the biggest sufferers , the burden of which had to be borne by the tax payers ,the Bank employees ,the Senior Citizens .The problem lies elsewhere.The politician-promoter nexus needs to be broken. How many promoters of defaulting companies have committed suicide on account of their businesses run into rough weather.?.While the company has been defaulting, the promoters have continued to go to foreign locales on vacation with their families. It's high time a radical change is called for.A proposal worth considering would be " It should be made mandatory for promoters/directors, of Corporates who have availed any sort of financial assistance (beyond a threshold limit) from PSBS/ Financial Intermediary to obtain a
“No Dues Certificate “ from these intermediaries before proceeding to any foreign country. Any concessions/ clearance may be granted only by Ministry of Finance/Ministry of Home as may be deemed fit.


DhanushDhari Misra

Feb 22, 2018

Very good thought provoking article! A copy should be sent to each every central and state legislative members (MPs and MLAs). Public interest litigation should be initiated to make the officers of the governments and government controlled banks including RBI accountable for the bad loans to corporate houses.

With Aadhar linking, even unsecured loans to retail borrowers like unsecured educational loans are much better assets than the NPAs of bad loans to corporate houses.

Equitymaster requests your view! Post a comment on "Narrow Banking: Public Sector Banks Should Not Be Lending to Corporates". Click here!