Banks would rather lend to govt than give you cheaper loan

Vivek Kaul
The State Bank of India (SBI) cut its base rate by 5 basis points (i.e. 0.05%, one basis point is one hundredth of a percentage) to 9.7% in response to the Reserve Bank of India (RBI) cutting the repo rate by 25 basis points (i.e. 0.25%). Guess it was their idea of a ‘bad’ joke. Repo rate is the interest rate at which the RBI lends to banks.
While newspapers have gone to town trying to tell you and me that interest rates are falling nothing like that has happened. A few banks have cut their auto loan rates but no major bank(other than SBI) has cut its base rate. Base rate is the lowest rate of interest at which a bank can lend.
Why has that been the case? Numbers tell a really interesting story.
As on March 30, 2012, banks had invested 28.55% of their deposits in government bonds. This number has since gone up and as on January 11, 2013, banks had invested 30.23% of their deposits in government bonds.
This means that during the course of this financial year (i.e. the period between April 1, 2012 and March 31, 2013) the Indian banks have invested a greater proportion of the deposits they managed to raise into government bonds.
The government issues bonds to finance its fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends.
What is interesting is that banks have to maintain a statutory liquidity ratio of 23% i.e. invest Rs 23 of every Rs 100 raised as demand and time deposits compulsorily into government bonds. But as of January 11, 2013, for every Rs 100 collected as deposits, banks had Rs 30.23 invested in government securities. And this has gone up from Rs 28.55 as on March 30, 2012. This in a scenario where banks need to invest only Rs 23 out of every Rs 100 raised as deposits in government bonds.
This tells us that banks would rather lend more to the government than you and me. This excess money chasing government bonds has led to a situation where the return on government bonds has fallen. The return on a 10 year government bond as on March 30, 2012, stood at 8.54%. On January 11, 2013, it was at 7.87%.
This excess lending and lower returns on the government portfolio has meant that banks need to continue charging high interest rates on the loans they make to consumers, in order to continue maintaining their profit levels. And that explains to a large extent why they haven’t cut interest rates despite the Reserve Bank cutting the repo rate by 0.25%.
The question to ask here is why are banks happy lending to the government rather than you and me? Is it a lazy banking? Why bother lending to individual consumers when you can lend in bulk to the government? Or are banks facing more losses on their lending and hence are sticking to lending to the government? Lending to the government is deemed to be safe given that even in the worst possible scenario the government can always print and repay money. Or is it a case of the government forcing public sector banks to invest a greater amount of their deposits than is required as per the law of the land, in government bonds?
Whatever be the case this excess lending to the government has led to a situation where banks are unable to cut interest rates.
It has also helped the government, allowing it to easily raise money from banks to finance its massive fiscal deficit at lower rates of interest. The fiscal deficit targeted for this financial year (i.e. the period between April 1, 2012 and March 31, 2013) was Rs 5,13, 590 crore. For the period April to November the fiscal deficit stood at around Rs 4,13,000 crore. This means that during the first eight months of the year, the fiscal deficit crossed 80% of the budgeted estimate.
If we project the fiscal deficit number for the first eight months for the entire financial year it is likely to come to Rs 6,16,000 crore, which is Rs 1,00,000 crore more than the budgeted fiscal deficit. And if the banks continue to help the government as they have in this financial year, the government can keep running its huge fiscal deficit rather easily.
There had been great pressure on the RBI governor D Subbarao to cut the repo rate. He had resisted the idea for a while now despite repeated hints given by the government in general and the finance minister P Chidambaram in particular. Now that he has gone ahead and cut the repo rate, it is not translating into subsequent cut in interest rates by banks.
In an interview to The Economic Times former RBI governor YV Reddy explained the friction between a central bank and the government by saying “A central bank that is always in agreement with the government is superfluous, just as a central bank that is always in disagreement is obnoxious. The solution really is to have messy coordination.”
To conclude, there is not much that the RBI can do to bring down interest rates. That will only happen once the government is able to control its fiscal deficit. And that is not happening any time soon. So higher EMIs and interest rates are here to stay.

The article originally appeared on on January 31, 2013.
(Vivek Kaul is a writer. He can be reached at [email protected])

Dear Kamal Haasan: Here’s how to make a 100% ban-proof film

mashallah-song-ek-tha-tigerAs imagined by Vivek Kaul
I am a closet film script writer.
The one thing I really want to do is a write masala film script which is different. Recently I ran into a film maker friend of mine and since he was in the mood to listen, I told him my story.
Acha hai,” he said, down two drinks of whisky.
“I am glad you liked it so much,” I replied, hoping that he would take it on and choose to direct it.
Par thoda change karna padega!”
I asked.
“We will have to change the religion of the villain.”
“Yes. We will have to make him a Parsi.”
“Oh why?” I asked, not having heard of a bawa villain in Hindi cinema for a very long time.
“Well. One they are too small in number and most of them barely watch Hindi cinema.”
“So?” I asked.
“So, some of there so called leaders won’t bother to protest that we have a shown a Parsi character in negative light.”
“I don’t get it.”
“And even if they do, their protests will fall on deaf ears because there are only around 70,000 of them. So they are not a vote bank.”
“Oh. But when was the last time you heard of a Parsi terrorist?” I asked rather humbly trying to drive home what I thought was an important point.
Arre yaar Vivek! It doesn’t matter. This is Hindi cinema. The absurd will just become absurder,” he said. “Chal, let me order a drink. Tu tamatar soup theek se pee!
Whatever you think is right,”I replied.
“Also, that side character of a cobbler. We will have to change that a little as well.”
“Hmmm!” I replied, wondering if my series of compromises had just started?
“We can’t call him a Raju mochi as you do in the script,” he explained patiently.
“But why?” I asked. “What do you call a mochi if not a mochi?”
Using the word mochi is insulting. You cannot call a cobbler a mochi. He needs to be called a charmakar. Accordingly you should call your character Raju Charmakar.”
But why? He is not a cobbler. He is just a spy pretending to be a cobbler,” I persisted.
Arre, you don’t remember. A few years back a movie called Aaja Nachle had a line in a song which went like this “Bazaar Mein Machi Hai Mara Maar, Bole Mochi Bhi Khud Ko Sunar.””
“So there were protests and they had to remove that word. And I don’t want my film to be stopped because of one word!”
The words “my film” were music to my ears. “As you say boss!” I agreed.
“Also, the side hero seems to be wearing saffron colour throughout the movie.”
“Yes. That’s how his character is na. It is a political thriller after all. I had to build in characters from across the spectrum.”
Wo to theek hai. But I don’t like too much saffron on the screen. You know my movies have a red theme. So lets make him wear red. We will also give him a song with a lot of red in it. I have a nice set in mind. Karjat main set banayenge.
Arre, that will change the entire meaning. How can red replace saffron?” I asked him, totally perplexed.
“Well if Vishal Bhardwaj’s bhains can be a pink gulabo instead of a red laali, I am sure the side hero can wear red instead of saffron. Samjha karo. It can have a big impact in the biggest territory.”
“As you wish,” I replied totally giving in to his demands.
And lets put in a song by Yo Yo Honey Singh,” he further suggested.
And I sunk into my chair.
Thoda daaru shaaru, weed-sheed, kudiyon shudiyon ke baare main gayega. And that will ensure that the movie will go housefull in the Delhi, Western UP and Punjab territory,” he continued.
“But what if it gets banned because of his song? Also the women have been rallying against him,” I asked.
Na na. The protesting women were the few dainted painted types.We will ensure that he doesn’t go to the same extent like he often does. Kuch hulka phulka, you know what I mean.”
“Hmmm,” I just nodded.
Aur yaar. Your heroine is too dry.”
“Yes. She is from a small town. But she is a total deshbhakt. That is why she helps the hero in his mission against the terrorists.”
Wo to theek hai. But lets spice her up!”
“As in?”
Arre thoda item number-wumber daalo!
“But she is a humble small town girl? It doesn’t sound right!” I pleaded.
“Let’s put in a dream sequence yaar.”
Dream sequence?”
“Yes. You know what I have a brilliant idea. We will also shoot the heroine under a waterfall. The same one where Raj ji shot Mandakini in Ram Teri Ganga Maili.”
Yeah. Your script says she is a village girl na.”
Small town girl,” I clarified.
Arre ek hi baat hai. And while she is bathing under the waterfall, the hero will see her for the first time. Wo scene poore single screen theatres ko loot lega!”
But who will do the heroine’s role? Katrina?”
She will be too expensive. Utne main to hero aa jayega. Arre we will take a new girl. She won’t have any inhibitions about shedding clothes if the scene demands so.”
“You think very differently,” I replied.
“Right now it is important to ensure that the film does not get banned. And no film ever gets banned because of its heroine! So heroine koi bhi ho sakti hai!” 
What about the lead role?” I asked. “Let’s take Shah Rukh.”
Na na. Bolta bahut hai wo! Ab to likhne bhi laga hai.
He might say something reasonably intelligent before the film’s release and there will be a huge controversy aur film dabbe main pad jayegi.”
But wouldn’t that be good publicity for the movie? I mean, My Name is Khan got a lot of publicity that way.”
Yes it did. But I don’t want to take that risk.”
So? Lets take Aamir then?”
Na na he is too much of an activist and intellectual type. And if you remember Gujarat had banned his movie Fanaa. Gujarat territory main Aamir risky hai.”
Let’s take Salman,” he replied confidently.
He barely speaks and when he does it sounds like Italian,” he replied. “So Rs 150 crore guaranteed.”
I had nothing to say. Money talks loudest.
The article originally appeared on on January 31, 2013

(Vivek Kaul is a writer. He can be reached at
[email protected]

Why interest rates do not follow Newton's third law of motion

Vivek Kaul
Newspaper editors are great believers in Newton’s third law of motion i.e. every action has an equal and opposite reaction. So if the Reserve Bank of India (RBI) governor Duvvuri Subbarao cut the repo rate by 0.25%, it should immediately translate into banks cutting interest rates on their loans as well. Repo rate is the interest rate at which RBI lends to the banks.
So if you are the kind who still reads newspapers you would have come to the conclusion by reading today’s edition of almost any newspaper that equated monthly instalments(EMIs) on loans are about to take a dip. The logic being that now that the RBI has cut the repo rate and that will lead to banks cutting the interest rates on their various loans as well and passing on the benefits to their current consumers and prospective customers.
Now only if it was as simple as that. Lets try and understand why.
The basic business model of any bank is very simple. It raises money as deposits at a certain rate of interest and then lends it out at a higher rate of interest. The difference in interest rate at which it lends and the interest rate at which it borrows is the money that a bank makes.
So for a bank to be able to cut interest rates on its loans it should first be in a position to cut interest rates on its deposits. Now this is where things get interesting.
The loans of banks (non food lending i.e.) over the last one year (between January 13, 2012 and January 11, 2013, which is the latest data available) have grown by around 15.7%. During the same period the deposit growth of banks has been at 12.8%.
Over the last period of the last six months (i.e. between July 13, 2012 and January 11, 2013) the trend is similar. The lending by banks has grown by 6.8% whereas the deposits have grown by 5.1%.
What this means in simple English is that banks are lending money at a much faster rate than they are able to raise through deposits. Hence, money is tight and banks will need to continue offering high rates of interest on their deposits. Given this, they will have to keep charging higher rates of interest on their loans.
And hence lower EMIs won’t be possible despite the firm belief of newspaper editors in Newton’s Third Law of Motion.
What is interesting is that this trend has been playing out for a while now. In 2011-2012 (i.e. the period between April 1, 2011 and March 31, 2012) bank deposits grew by 13.8% whereas loans grew by 16.3%. In 2010-2011 (i.e. the period between April 1, 2010 and March 31, 2011) the deposits grew by 16.7% whereas loans grew by 23.3%.
The other metric to look at here is the incremental credit deposit ratio. For the period of the last six months this stands at 99.3%. This means that for every Rs 100 that the bank has raised as a deposit in the last six months it has given out Rs 99.3 as a loan.
Now this is a problematic situation to be in. For every Rs 100 raised as a deposit the bank has to maintain a statutory liquidity ratio of 23% i.e. invest Rs 23 in government bonds. Governments bonds are basically bonds issued by the central government to finance its fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
Banks also needs to currently maintain a cash reserve ratio of 4.25% with the RBI i.e. for every Rs 100 raised as a deposit the bank needs to maintain Rs 4.25 with RBI as a deposit. The CRR will come down to 4% from February 9, 2013.
So what does this mean? It means that for every Rs 100 raised as a deposit Rs 27.25 (Rs 23 + Rs 4.25) cannot be given out as a loan. The remaining Rs 72.75 (Rs 100 – Rs 27.25) can be loaned out. Even there the bank needs to maintain some cash in its vaults to pay people who may be withdrawing money from the bank.
So given all this for every Rs 100 that a bank raises as a deposit it can basically loan out around Rs 65-70. But in the last six months the banks have loaned almost every rupee that they have raised as a deposit.
How has that been possible? That has been possible because banks have been withdrawing money that they have invested in government bonds in the previous years and giving that money out as loans.
This is something that may not be possible forever because banks needs to maintain a SLR of 23%. They can’t go below that. As T N Ninan wrote in the Business Standard sometime back “In the last two of these years, the credit growth rate (i.e. the loan growth rate) outpaced that of deposits; as should be obvious, this cannot go on indefinitely. And here’s the thing; nearly 40 per cent of the lower credit growth over the past year has been financed by a drop in banks’ investment in government securities; so a good bit of the money that has been lent has not come from customer deposits. Banks could continue to pull money out of government securities, but if they did that the government would not be able to finance its deficit.”
In this scenario where banks are lending out almost every bit of the money they are raising as deposits it is difficult for them to cut interest rates on their deposits and hence on their loans.
The only way bank interest rates can come down is if the government borrowings come down. And that is only possible if the government is able to manage its burgeoning fiscal deficit. Whether that happens on that your guess is as good as mine.
Meanwhile, newspaper editors will continue to believe in Newton’s third law of motion.

The article originally appeared on on January 30, 2013, with a different headline
(Vivek Kaul is a writer. He can be reached at [email protected])

Why Yo Yo Honey Singh is out of the doghouse

Kashmiri Pandits are the new Punjabis,” is a statement I have often made among my relatives in the past. They have taken onto most things Punjabi since being thrown out of the valley in the late 1980s and settling primarily in Delhi and Jammu.
And nowhere is this conversion more visible than during a Kashmiri wedding. Over the years it has become as big a show off and as ostentatious as a Punjabi wedding.
And what is a Punjabi wedding without a deejay playing the songs of Yo Yo Honey Singh and people dancing to it?
Last night I was out attending the pre-wedding celebrations of a cousin. Yo Yo Honey Singh was on full blast singing about dope-shopedaaru-shaaru and kudiyan-shudiyan. As was Mamata Sharma singing “main to tandoori murgi hoon yaar gatak le mujhe alcohol se”.
As I walked out of the community centre where the event was happening, there were several other weddings happening in the area and the one thing that seemed to be common to all the loudspeakers blaring out music after the deadline of 10pm was Yo Yo Honey Singh and his take on how he thinks the world is and should be.
What this anecdotal evidence clearly tells me is that Honey Singh is back in the good books of the Dilliwallahs and they seem to have completely re-accepted him and in the process rehabilitated him and the legacy he is creating. This after all the trouble they had a few week backs with his songs and the fact that they ‘encouraged’ men to rape women. Now they don’t mind playing his songs full blast at a wedding.
Honey Singh himself is also back to his good old ways. He has a new song out and its called punjabiyan di battery charge rehndi haifrom the movie Mere Papa ki Maruti. In this song Honey Singh tells youngsters about the importance of daaru and large pegsin having a good time and ensuring that there batteries are always charged up. He also talks about a desi feel which sounds more like desi weed. This is a tactic straight out of his other hit songs where the word weed is used with other similar sounding words, so as to create enough doubt in the mind of the listeners, as to what is he actually singing?
Hence, Honey Singh is clearly back in business. The angst against him has died down and gone away very quickly and in a way as if it never really existed. Or as someone told me at the pre-wedding function yesterday, when did Delhi ever stop playing Yo Yo Honey Singh? “It was only a few dented-painted types who had a problem with his music and they are now done with their protesting,” went the remark.
The question that we need to ask is whether songs of Yo Yo Honey Singh encourage men to drink and dope, like a few weeks back they encouraged men to rape women? Someone as important as Rahul Gandhi had concluded a few months back that seven out of 10 youth in Punjab are drug addicts.
So has Yo Yo Honey Singh had a role to play in that? Or are his songs a reflection of the way Punjab and its youth have evolved?
Or as the oft asked cliché on the Hindi film industry goes “Is cinema a reflection of the society?” or is it the other way around? Do forms of popular culture (which is what Hindi cinema and Yo Yo Honey Singh are) reflect what is going on in the society or are they the cause of what is going on in the society?
The truth, though not obvious, lies somewhere in between. Gulzar had a very interesting answer for this in a recent interview published in The Indian Express. When asked about whether the “izzat lootna” and “bhagwan ke liye mujhe chhod do” scenes in Hindi cinema, were also the cause of women being raped, among other reasons, this is what he had to say. “The problem is that when we read about such incidents in newspapers, we feel angry, we feel bad and it pains us. But in cinema, the same thing becomes entertainment… This should not have happened. A filmmaker’s mindset also matters a lot. It’s very important for a filmmaker to know what impact it can make. It should not be made a medium of entertainment…But it would be wrong to say that it has come from cinema. This has come into cinema from society.”
The same logic applies to Yo Yo Honey Singh as well when he talks about dope and drink. His songs may reflect what he sees around him but at the same time they have been responsible at some level for making “doping” and “drinking” cool.
The same stands true for item numbers dished out by the Hindi film industry, while the tunes might be catchy, but at the end of the day they do make the commodification of women, entertaining.
This is a fact that even women don’t realise. And that perhaps explains why I saw a host of educated women dancing away to glory last night to songs like “main to tandoori murgi hoon yaar gatak le mujhe alcohol se” and “pallu ke peeche chipa ke rakha hai utha doon to hungama ho jaaye”.
And what about the men? Well. They have always had a good time. 

Truth, as they say, is stranger than fiction.
The article originally appeared on on January 29, 2013. 

(Vivek Kaul is a writer. He can be reached at [email protected])

What made Ranchi famous before Dhoni came along

Vivek Kaul
Bill Bryson, probably the best travel writer of this age, once wrote “You can never make a waiter see you before he’s ready to see you, you can never beat the phone company, and you can never go home again.”
The flourish of the statement notwithstanding it clearly isn’t a law of physics. Mahendra Singh Dhoni is going home again today and playing an international cricket match in a city where it all began for him. Life has come a full circle for Dhoni.
Dhoni put Ranchi, a city of around 10 lakh people, and no heroes other than freedom fighter Birsa Munda and Param Veer Chakra winner Albert Ekka, on the map of India and the rest of the world. He explains it best when he says “When I started my international career, people during the overseas tours used to ask me where I came from. I would first say India, then Jharkhand and then Ranchi. The next question invariably was, ‘Where is Ranchi?’ I had to explain in different ways by saying, ‘It’s near Calcutta, near Jamshedpur from where Tata originated. It’s India richest state in terms of minerals.”
Having been born and brought up in Ranchi I can totally relate to what Dhoni is trying to say here. My childhood retort to the question ‘Where is Ranchi?’, used to be that its the city through which the Tropic of Cancer passes, not knowing that the Tropic of Cancer was an imaginary line passing through a lot of other places in India as well.
Also Ranchi was Agra’s less famous cousin. In popular speak “Agra jaana hai kya” has never meant visiting the Taj Mahal, but the famous mental hospital in the city. Along similar lines Ranchi was famous, at least in parts of Eastern India, for its Kanke Mental Hospital, with the phrase “Kanke jaana hai kya” being seen as an insult on anyone it was used.
After Dhoni burst onto the cricketing scene in 2004, questions about the geographical whereabouts of Ranchi were confined to the dustbins of history. Having said that the question I try and answer in this piece is that what was Ranchi before it became that city from which Dhoni comes from?
One of the surprising facts that I learnt from my social studies text book in the third standard was that Ranchi is also called the hill station of Bihar (since 2000, Ranchi has been the capital of Jharkhand, before that it was a part of Bihar).
A few years later I understood that the textbook had not been updated since the 1960s when Ranchi actually was a hill station where the Bengali bhadralok came to visit and stay during the summer months. The story goes that the industrialist Aditya Birla and his wife Rajasree honeymooned in Ranchi. What would have given the city the tag of a hill station was the fact that it rained a lot even during the summer months.
But as the city expanded and the forests and the greenery was cut down, the temperatures rose, crossing 40 degree Celsius during the summer months, and it could no longer be called a hill station.
The next big thing to happen in the city was the setting up of a large number of public sector enterprises. This included the Heavy Engineering Corporation (HEC), Central Coalfields Ltd(CCL), Steel Authority of India Ltd (SAIL), MECON Limited, formerly known as (Metallurgical & Engineering Consultants (India) etc. This was primarily because the area around Ranchi was richly endowed in minerals.
Dhoni’s father Pan Singh was an employee at MECON Ltd. The setting up of public sector enterprises brought people from all over India to Ranchi, and this included Pan Singh as well, who originally belonged to the Almora district in Uttarkhand.
Jawahar Lal Nehru’s big decision of setting up public sector enterprises and not encouraging entrepreneurship and private business may have cost the country dearly, but it did give us a Mahendra Singh Dhoni. It is unlikely that Dhoni would have become what he has if his father would have continued living in his village in Almora. If it was not for Nehru’s vision which screwed up India, Dhoni might have been a humble farmer in Uttarkhand. Even unintended consequences can be healthy at times.
The other interesting thing that happened starting in the 1980s was that Ranchi started sending an astonishing number of students to the IITs for a city of its size. In the mid 1980s, St Xavier’s College, Ranchi, send in 73 students to the IITs in a single year. And this was before coaching became the norm. What cities like Kota are doing now, Ranchi did in the 1980s.
The year 1983 also saw Ranchi fall to the Hip Hip Hurray phenomenon. Hip Hip Hurray was the first film directed by the now famous director Prakash Jha. And he shot the movie in two schools in Ranchi, Vikas Vidyalaya and the Bishop Westcott. I remember seeing posters of the film being plastered all over the city and the elders being quite excited about a full Hindi film having been shot in the city.
So that was as exciting as the city got while I was growing up there. Another important landmark for Ranchi was in the early 1990s when the entire city did not have power during the peak of summer for a period of 15 days. Rumor mills were abuzz that Lalu Yadav had got the entire thing done, so that power could be transmitted to Patna and other parts of North Bihar, which were reeling under a heat wave. This was the last nail in the coffin for Lalu Yadav and his party when it came to winning elections in Jharkhand.
Dear reader, if you have managed to read this far, you will realise that Ranchi, the city where I and Dhoni grew up in, was a city where nothing much happened. The modern sense of the term being, it was boring. It did have its odd ironies though, like the fact that the most famous shopping complex in the city was owned by the Gossner Evangelical Lutheran Church.
But to me Ranchi will remain the city of dark clouds and rain. And red gulmohar in all its glory. And power cuts. And studying under a kerosene lamp with the hope that power would come back by the time Chitrahar started. And learning tricks of how to rekindle extinguishing candle flames. And listening to the brilliant Ameen Sayani host the Binaca Geet Maala with me making notes of the song rankings. And h
aving sofites at Firayalal. And boarding auto-rickshaws with even nine people at times. All this before it got that man called Mahendra Singh Dhoni.
The trouble with nostalgia is that if it gets too nostalgic, there is a danger of creating a time and a place, which did not exist. So let me stop here.
The article originally appeared on on January 19,2013.

(Vivek Kaul is a writer. He was born and brought up in Ranchi. He can be reached at [email protected]