There are a number of concerns with the Indian banking sector, with the most important concern being Non-Performing Assets (NPA's). According to Assocham, the reported Gross NPAs of state-run banks rose by 35% to Rs3,61,731 crores in December 2015 from Rs.2,67,065 lakh crore in March 2015. In contrast, private sector banks' gross NPA's rose by 26% to Rs39,859 crore in December 2015 from Rs31,576 crore at the end of March 2015. If we were to add rescheduled loans to the quantum of gross bad loans, the figures would be much worse. Clearly that asset quality is one of the key differences between public and private banks. Hence, it makes sense to find the answer to the question – to whom are these two category of banks lending? Wisdom Tree has done some data-crunching, which has yielded some interesting results. 

Proportion of loans lent to different Sectors (Average of Top 3 Banks)

Major private sector banks are retail-focussed. Public sector banks have a higher proportion of industrials and infrastructure loans compared to the private sector. Where do the defaults lie? Does the industrials sector account for a higher proportion of defaults as compared to the retail sector, leading to higher NPA's? The below chart gives the sector-wise bifurcation of new defaults as per Wisdom Tree. 

Source: Wisdom Tree

The above chart shows a yawning gap between between the defaults for retail and industrials sector. The retail sector accounts for merely 3% of the new defaults as compared to 53% for the industrials sector. The retail-sector consisting of the growing middle class is a lot more disciplined as compared to the industrials sector when it comes to repaying loans.

Armtwisted lending practices and corruption are blamed by many for these bad loans. However, the level of stress is a lot more pronounced in the so-called non-priority areas, when compared to the exposures to the farm sector and the micro enterprises. Large industries are the ones that have the highest NPA ratio. This implies bad lending practices are to blame.