LINKAGES BETWEEN SENSITIVE SECTOR LENDING AND NON-PERFORMING ASSETS IN INDIAN BANKING

Reserve Bank of India has stipulated exposure norms and appropriate risk weights for banks in India. Bank exposure to certain sectors need to be carefully managed and monitored regularly in view of stability of the financial system. Study of credit allocation and sectorial or geographic distribution of bank credit provides an understanding of the contribution of bank credit towards economic growth and financial inclusion as well as its role in maintaining financial stability. Three sectors via real estate, capital markets and commodities have been classified under the head of „Sensitive Sectors" for banks. These sectors have been deemed to be sensitive for the stability of banks considering the (often violent) price fluctuations in the underlying asset/ product markets. Accordingly, banks exposures to sensitive sectors presumes significance in the context of financial stability as underlying assets in these sectors are subject to fluctuations in prices, and as such leads to booms in loans and advances. This paper makes an empirical assessment of the addition to NPA in banks based on their exposure to sensitive sectors. Using data for the period of 2002 to 2016 for 46 Scheduled Commercial Banks operating in India during the period, with the help of linear regression, we find evidence of significant relationship between incremental NPA and bank exposure to sensitive sectors. We suggest steps to look into this in order to maintain the financial health of the banks and the overall financial system in the country