Finance minister Piyush Goyal is expected to take up state-run banks’ bad loan situation and urge them to increase lending to the politically crucial MSME sector at a meeting with the PSU bank chiefs on Monday.

The meeting comes three days ahead of the interim budget and nine days ahead of a monetary policy review by the RBI.

Goyal, who was given additional charge of the finance ministry last Wednesday as Arun Jaitley is in the US for medical treatment, will have a host of issues to discuss, including credit offtake, the bad loan position, loans to priority sectors such as MSME and agriculture and bankruptcy proceedings of various companies.

Though PSU banks are being asked to lend more to the MSME sector, top officials have expressed their reservations. The lenders are worried that higher credit to the MSME sector could increase the gross bad loans of the sector.

Bankers said they had brought this to the notice of the finance ministry. “There has been considerable credit growth for the MSME sector. While the percentage of bad loans to this sector has remained constant, in money terms it has grown exponentially, especially if you take into account the fact that there has been a 23-24 per cent increase in loans to them in recent months, “ the director of a Delhi-based PSU bank said.

Loans to the micro sector are up 22.3 per cent over last year, while they grew 18 per cent for small businesses. Credit offtake by mid-sized firms rose 7.2 per cent compared with 12 per cent for big businesses. “This is phenomenal growth which cannot be sustained,” said bankers.

Bad loan of MSMEs rose marginally to 13.08 per cent for public sector banks at the end of March 2018 compared with 12.56 per cent in March 2017, according to RBI data.

“This does not mean MSMEs are doing okay.... because of aggressive fresh lending, the overall NPA rate has remained where it was, which, too, is far higher than the norm of 9 per cent considered dangerous,” bankers added.

Earlier this month, the RBI gave into the Centre’s demand and agreed to allow restructuring of MSME bad loans. Conditions such as interest rates and loan period can now be revised to reclassify as standard what would have otherwise turned into a bad loan.

Known as “regulatory forbearance” in banking, such restructuring was widely misused earlier to ever-green corporate loans till former RBI governor Raghuram Rajan stepped in to put an end to the practice in 2015.