What a Slowdown in Retail Loans Tell Us About a Slowing Economy

In the recent past a lot has been written about the overall slowdown in bank lending. Take a look at Figure 1. It essentially tells us about the loans given out by banks during the period between May 2016 and May 2017, and May 2015 and May 2016, before that.

Let’s start with non-food credit. These are the loans given out by banks after we have adjusted for food credit or loans given to the Food Corporation of India and other state procurement agencies, for buying rice and wheat directly from farmers at the minimum support price (MSP) for the public distribution system.

Figure 1:

Type of Loan Total Loans Given Between May 2016 and May 2017 (in Rs Crore) Total Loans Given Between May 2015 and May 2016 (in Rs Crore)
Non-Food Credit 4,22,001 6,25,975
Loans to industry -56,455 24,383
Retail Loans 1,94,553 2,27,863

Source: Reserve Bank of India 

The total amount of non-food credit given out between May 2016 and May 2017 is down by 33 per cent to Rs 4,22,001 crore, in comparison to the period between May 2015 and May 2016. Hence, there has been a huge overall slowdown in the total amount of loans given out by banks over the last one year, in comparison to the year before that.

Why has that been the case? The major reason for the same are loans to industry. Banks are in no mood to give out loans to industry. During the period May 2016 and May 2017, the total loans to industry actually shrunk by Rs 56,455 crore. This basically means that on the whole the banks did not give a single rupee of a new loan to the industry. During the period May 2015 and May 2016, banks had given fresh loans worth Rs 24,383 crore to industry, overall.

This is happening primarily because banks have run a huge amount of bad loans on loans they had given to industry in the past. As on March 31, 2017, the bad loans ratio of public sector banks when it came to lending to industry, stood at 22.3 per cent. Hence, for every Rs 100 of loan made to industry by public sector banks, Rs 22.3 had turned into a bad loan i.e. the repayment from a borrower has been due for 90 days or more.

Not surprisingly, these banks are not interested in lending to industry anymore. This has been a major reason behind the overall slowdown in lending carried out by banks, as we have seen earlier.

But one part of lending that no one seems to be talking about is retail lending carried out by banks. This primarily consists of housing loans, vehicle loans, consumer durables loans, credit card outstanding, loans against fixed deposits, etc. The assumption is that all is well on the retail loan front.

As far as bad loans are concerned, things are going well on the retail loans front. But what about the total amount of retail loans given by banks? Between May 2016 and May 2017, the total amount of retail loans given by banks stood at Rs 1,94,533 crore. This was down by around 15 per cent to the amount of retail loans given by banks between May 2015 and May 2016. This, despite the fact that interest rates on retail loans have come down dramatically in the post demonetisation era. You can get a home loan now at an interest of as low as 8.35 per cent per year.

A major reason for this slowdown in retail loans are housing loans, which form the most significant part of retail loans. Between May 2016 and May 2017, the total amount of housing loans given by banks stood at Rs 92,469 crore down by 22 per cent in comparison to the housing loans given out by banks between May 2015 and May 2016.

Lower interest rates on home loans haven’t helped much. The only explanation of this lies in the fact that high real estate prices continue to be the order of the day across the country. How do things look with vehicle loans which form a significant part of the retail loans? Between May 2016 and May 2017, banks gave out vehicle loans worth Rs 18,447 crore, 26 per cent lower than the vehicle loans given out by banks between May 2015 and May 2016.

What does this tell us? It tells us very clearly that things have deteriorated even on the retail loans front. People take on retail loans only when they are sure that they will be able to continue repaying the EMIs in the years to come (unlike corporates). The fall in the total amount of retail loans lent by banks over the last one year clearly tells us that the confidence to repay EMIs, is not very strong right now.

This is another good indicator of the overall slowdown in the Indian economy, which has happened in the post demonetisation era.

The column originally appeared in Equitymaster on July 24, 2017.

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Bank Lending Down by Half in 2016-2017

RBI-Logo_8

On April 6, 2017, the Reserve Bank of India(RBI) published the latest Monetary Policy Report. Buried on page 40 of the report is a very interesting data point which rather surprisingly hasn’t been splashed on the front pages of the pink papers as yet.

In 2016-2017, Indian banks gave out total non-food credit worth Rs 3,65,500 crore. Banks give working-capital loans to the Food Corporation of India(FCI) to carry out its procurement actions. FCI primarily buys rice and wheat directly from Indian farmers using the loans it takes from banks. When these loans are subtracted from overall loans given out by banks, we arrive at non-food credit.

In 2015-2016, the total non-food credit of banks had amounted to Rs 7,02,400 crore. What this means that non-food credit came crashing down by close to 48 per cent during the course of 2016-2017, the last financial year. To put it simply, this basically means that in 2016-2017, banks lent around half of what they had lent out in 2015-2016.

The important question is why has this happened? A major reason for this is that the total outstanding loans to industry has actually shrunk in 2016-2017(between April 2016 and February 2017, which is the latest data available) by Rs 60,064 crore. This basically means that Indian banks on the whole, did not give a single new rupee to industry as a loan during the course of 2016-2017.

And the reason for that is very straightforward. Over the years many corporates have defaulted on the loans they had taken on from banks, in particular public sector banks. And this explains why banks are not in the mood to lend to corporates anymore. As they say, one bitten twice shy.

In fact, as on December 31, 2016, the gross non-performing assets or bad loans of public sector banks had stood at Rs 6,46,199 crore, having jumped by 137 per cent over a period of two years. Bad loans are essentially loans in which the repayment from a borrower has been due for 90 days or more. The bad loans of private banks as on December 31, 2016, stood at Rs 86,124 crore.

A major chunk of these defaults has come from corporates. As of March 31, 2016, the total corporate bad loans of public sector banks had stood at Rs 3,36,124 crore or 11.95 per cent of the total loans given out to corporates. It formed a little more than 62 per cent of the total bad loans. This is the latest number I could find in this context. There is enough anecdotal evidence to suggest that the situation has worsened since then.

Given this, as I said earlier, banks are not in the mood to lend to corporates. Hence, their overall lending for 2016-2017 has shrunk by half in comparison to 2015-2016.

The interesting thing is that while Indian banks may not be lending as much, the other sources of funding haven’t really dried up. Private placements of debt jumped up majorly in 2016-2017 in comparison to 2015-2016 and so did issuance of commercial paper by non-financial entities. Over and above this, the foreign direct investment into the country continued to remain strong. During 2016-2017, FDI worth Rs 2,53,500 crore came into the country. This was more or less similar to the amount that came in 2015-2016.

In total, the flow of financial resources to the commercial sector stood at Rs 1,262,000 crore, the RBI estimate suggests. This is around 12.1 per cent lower than the last year. Hence, the overall availability of money has shrunk but the situation is not as bad as bank lending data makes it out to be.

Basically, while banks may not want to lend to corporates, there are other sources of funding that do remain strong. Having said that, a fall of more than 12 per cent in total flow of financial resources to the commercial sector, is not a good sign on the economic front. This can only be corrected only after banks come back into the mood to lend to corporates. And that will only happen when banks get into a position where they are able to recover back from corporates a significant chunk of their bad loans. As of now no such signs are visible.

 

The column originally appeared in the Daily News and Analysis on April 25, 2017