Growth in Retail Lending Won’t Revive Indian Banking


Various parts of an economy do not operate in isolation. The way one part of an economy operates has an impact on other parts.

What is true for the broader economy is also true for banking. Banks operate by raising deposits and lending that money out as loans. These loans are made to various sectors of the economy from industry to services to retail.

Take the case of bank lending growth to the industry. When I talk about lending growth in this piece I talk about lending growth over a period of one year. So, if lending growth to industry in May 2014 was 11.3 per cent, then this was the growth in the total amount of loans given by banks to industry between May 2013 and May 2014.

Take a look at Figure 1. It shows the growth in bank lending to industry over the last four years between September 2012 and August 2016.

Figure 1

As can be seen from Figure 1, the curve is downward sloping. What does this mean? It means that the growth in bank lending to industry has been falling over the last four years. It peaked in November 2012 at 19.4 per cent i.e., the growth in bank lending to industry between November 2011 and November 2012 had been at 19.4 per cent.

Since then the growth in bank lending to industry has taken a downward trend. In August 2016, the latest data available, the bank lending to industry contracted by 0.2 per cent. This means that the overall bank lending to industry contracted between August 2015 and August 2016. This is something that has never happened in the last four years.

In fact, this is the first time in the last four years that the growth in bank lending to industry has entered into negative territory. The Indian Express recently reported that growth in bank lending to industry had entered negative territory for “the first time… at least [in] a decade.”

The question is: Why is this happening? One reason for it lies in the fact that capacity utilisation in industry continues to remain low. As per the latest RBI Obicus Survey, the capacity utilisation of industry for the period April to June 2016 stood at 72.9 per cent. The capacity utilisation levels have been between 70 per cent and 75 per cent over the last three years. (Obicus stands for Order Books, Inventories and Capacity Utilisation Survey).

What this means is that the industry is operating at less than three-fourths of its full capacity. In this situation, there is no reason for the industry to borrow from banks to expand its facilities.

Are there any other reasons for the contraction in lending to industry? Take a look at Figure 2.

Figure 2 

The Figure 2 tells us very clearly that bank lending to industry formed around 45-46 per cent of overall lending (non-food credit) up until March 2014. After this, the Reserve Bank of India cracked the whip and asked public sector banks to start recognising the bad loans they had on their books.

Up until then, these banks had managed to keep the bad loans on their books using various strategies. One of the strategies that banks had used to keep the bad loans going was to give fresh loans to companies not in a position to repay their loans, so that they were able to repay their old loans. Once this stopped, the growth in loans to industry started to slow down. This is possibly another explanation on the slowdown in growth of bank loans to industry.

The question is: Where exactly are the banks’ lending? The growth in overall lending by banks in August 2016 stood at 8.2 per cent. This was the second slowest month in the last four years (June 2016 was the slowest) as far as growth in overall bank lending is concerned. Nevertheless, the growth in overall bank lending is in positive territory unlike growth in lending to the industry.

How is this happening? The banks are giving out more and more retail loans (or what the RBI calls personal loans). Take a look at the growth in retail loans over the last four-year period. (See Figure 3).

Figure 3 

While the growth in lending to industry was a downward sloping curve (as can be seen in Figure 1), the growth in retail lending by banks is an upward sloping curve (as can be seen in Figure 3). The question is to what extent has been lending to industry been replaced by retail lending by banks. Take a look at figure 4.

Figure 4 

In September 2011, the total retail loans given by banks formed 19.1 per cent of overall loans given by banks (non-food credit). This has since then gone up and as of August 2016 stood at 22.2 per cent.

It is interesting to see that the bank lending to retail as a proportion of total lending started to go up around March 2014, the point at which lending to industry as a proportion of overall bank lending started to fall.

Hence, it is clear that to some extent banks have managed to replace lending to industry through retail lending. When banks lend to the retail sector they give people loans to buy homes, scooters, motorcycles, cars, consumer durables etc. They also let people to buy things on their credit card and give out personal loans (or what banks call personal loans).

Ultimately this lending is likely to push up demand for consumer goods and this should push up the capacity utilisation rates of industries. Once this happens on a sustained basis only then will lending to industry start to go up again.

Retail lending is expected to pick up in the days to come as the government pays higher salaries to its employees under the recommendations of the Seventh Pay Commission. In the months to come, the salaries of the state government employees are also likely to be revised as well, as they will a demand higher pay which is at par with their central government brethren.

All this is expected to help push up demand for consumer goods, and retail loans given by banks. In turn, this is expected to lead to better capacity utilisation rates. The question is will this push capacity utilisation enough (i.e., close to 80 per cent levels). I have my doubts on that front.

Further, the retail lending despite a substantial jump still forms only around 22 per cent of overall lending. Hence, there is no way it can go around replacing industrial lending, which continues to remain the major business for banks. It also needs to be mentioned here that if banks try to grow their retail book rapidly in the time to come beyond a certain size, they will have to do so by lowering their lending standards, as they had done in case of lending to industry a few years back. The question is will they want to make the same mistake again?

Also, it is safe to say that a further 25 basis points cut in the repo rate by the Reserve Bank of India later this year, is not going to make any difference on the industrial lending by banks. In fact, since January 2015, the RBI has cut the repo rate by 175 basis points to 6.25 per cent. In January 2015, lending to industry formed 44.3 per cent of overall bank lending. In August 2016, it formed 40 per cent.

So much for the impact of lower interest rates.

The column originally appeared in the Vivek Kaul Diary on October 18, 2016



“With every passing day I like Barack Obama even more,” remarked an ex-colleague a few days back. In fact, this seems to be the general feeling these days. The recent CNN/ORC poll put Obama’s approval ratings among Americans at 55 per cent. Obama’s rating in 2016 has been at 51 per cent. This has been the highest since his first year as President.

Obama is currently what Americans call a lame duck President. An individual can become the US President only twice. This essentially ensures that any President is typically lame duck during his last few months as President.

So what explains such high approval ratings for Obama, given that there is no way he is going to get a third term? What the economists call the contrast effect is at work. As Barry Schwartz writes in The Paradox of Choice—Why More is Less: “If a person comes right out of a sauna and jumps into a swimming pool, the water in the pool feels really cold, because of the contrast between the water temperature and the temperature in the sauna. Jumping into the same pool after having just come indoors on a sub-zero winter day will produce sensations of warmth.”

And it is this contrast effect which has been driving up the approval ratings of Barack Obama. The elections to elect the next American President are scheduled to happen on November 8, 2016. The two main candidates are Hillary Clinton and Donald Trump. Of course, when people compare Obama to Clinton and Trump, he comes out right on top. This contrast effect has essentially ensured that Obama’s approval ratings have gone up.

In fact, the contrast effect has even led some people to say that Michelle Obama might be the right candidate for President in the years to come. As Myra Gutin professor at Rider University and author of The President’s Partner: The First Lady in the Twentieth Century put it: “Michelle Obama is able to talk to people in a way in which Hillary Clinton can’t.”

While the American first lady has maintained that she has no political ambitions, there is already speculation being made that she might be elected to the American Senate in the years to come. And all this is happening because of the contrast effect that is at work.

In India, closer to home, the prime minister Narendra Modi suddenly starts looking so much better when we compare him to the Congress Party leader Rahul Gandhi.

In fact, the contrast effect is a standard tool used in the marketing of products. A 1992 research paper written by Itamar Simonson and Amos Tversky, shows this through an example of a retailer who was selling a bread making machine. The machine was priced at $275. In the days to come the company also started selling a similar but larger bread making machine priced at $429. The sales of this new machine were very low. But a very interesting thing happened. The sales of the $275 machine more or less doubled.

The $275 bread making machine was expensive on its own. But when compared to another machine at $429, it suddenly started looking like a good deal and the sales went up.

In fact, this is a standard trick used by retailers all over the world to great effect. By displaying two largely similar but differently priced products, the sales of the product with the lower price can be increased significantly by making it look like a bargain.

Retailers often use this trick to promote their own brands by placing their own cheaper products against more expensively priced other brands. Tim Harford points this out in his book The Undercover EconomistIn Dalston, Sainsbury’s [a big retailer] own brand of fresh chilled juice was sitting next to the Tropicana at about half the price.”

The moral of the story is, whether it’s juice or the American President, the contrast effect can really drive up sales.

The column originally appeared in Bangaore Mirror on October 19,2016

Of Tata Nano and why the customer is always right


The Tata Nano car was launched with great fanfare in January 2008, more than eight and a half years back. In fact, given its low price point, the car was supposed to disrupt the automobile market in India.

One of the fears on which many columns were written was that the traffic on the roads would increase dramatically. The assumption was that way too many Tata Nanos would be sold. Nothing of that sort happened. This was also a point of discussion among people who already had bigger cars. They were worried, now that everyone would be able to afford a car, the traffic on the roads would simply explode. In that scenario, how would they drive their cars?

But nothing of that sort happened.

In fact, over the last one year (between September 2015 and August 2016), the Tata Nano Gen X has sold 15,949 units. In comparison, the Maruti Suzuki Alto 800, the bestselling car in this category has sold more than 1.69 lakh units.

More than eight years after it was first launched, it is safe to say that the Tata Nano is nowhere near the success it was expected to be. Many reasons
been offered for it. One reason offered is that by talking about the Rs 1 lakh price point, over and over again, the Nano was projected as a “cheap” car.

As brand guru Jack Trout told The Economic Times a few years back: “People don’t want a ‘cheap’ car, which their neighbours can see. Especially in India, there’s a prestige thing about buying a car.”

Another reason offered was that with all the hype around the car, people were expecting something out of this world. What they got was a normal car.

Still others felt that the launch should have been small instead of the big bang launch that was carried out at the 9th Delhi Auto-Expo in January 2008. The press from the entire world descended on Delhi to cover the launch of the Tata Nano.

Nevertheless, as marketing professor Nirmalya Kumar put it: “When the product development is radical you always do a small launch. They did a huge launch for Nano. They should have done a smaller launch.” The idea was that any innovation which as radical in nature as the Tata Nano was, needs to be tinkered with and it gradually needs to be figured out what the customer really wants.

But with a big bang launch, the tinkering that Kumar talks about was no longer possible. Another reason offered for Nano’s failure was that the negative publicity that the company faced in the aftermath of some cars catching fire in 2010.

The one thing common with all these reasons is that they were all offered after the car did not meet the expectations that it was supposed to. Hence, there is a huge hindsight bias built into these reasons. Further, some of the reasons offered could have been offered even before the launch.

Take the case of the Nano being projected as a cheap car. This was a reason that could have been offered even before the car was launched because everyone knew what the likely price point of the car was to be.

The point is that in retrospect many reasons can be offered for a product not doing as well as it was expected to do. Nevertheless, there is only one valid reason. As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “In a free market, the customer is always right. If the customers don’t want it, it means that it is not a good car. It doesn’t matter if all the university professors and all the priests and mullahs cry out from every pulpit that this is a wonderful car – if the customers reject, it is a bad car.”

And when it comes to the Nano, that is the only truth. The customers rejected it. We can keep figuring out the other reasons till kingdom come.

The column originally appeared in the Bangalore Mirror on October 12, 2016


Modi Govt Has Made a Start, But More Loss Making Companies Need to Be Shutdown


On September 28, 2016, the union cabinet led by the prime minister Narendra Modi, decided to shutdown Hindustan Cables Ltd (hereinafter referred to as Hindustan Cables). This is one of the best decisions that the Modi government has made in the recent past and I sincerely hope that this trend to shutdown loss-making public sector enterprises continues.

Hindustan Cables has had no production activity since January 2003. Take a look at the following table. The company accumulated losses of Rs 5,847 crore in the decade spanning 2005 and 2015:

YearLosses(in Rs crore)
Source: Public Sector Enterprises Survey

In 2014-2015, the company incurred total losses of Rs 933 crore. It was sixth in the list of the ten largest loss making public sector enterprises in India. In fact, it has constantly been in the list of the ten largest loss-making public sector enterprises since 2005-2006.

Given that it has not produced anything since 2003, the closure has taken way too many years to finally happen. Other than the losses, the company also managed to accumulate a huge amount of debt. As of March 31, 2015, the company had a total debt of Rs 5,963 crore. And not surprisingly, the interest that needs to be paid on this debt was the biggest expense of the company.

In 2014-2015, the total interest on debt amounted to Rs 747 crore. The company stopped production in 2003. Given this, it was not earning anything from its operations. In this scenario, in order to continue paying the employees on its rolls, it had to borrow money. Employees’ remuneration and benefits at Rs 113 crore was the second largest expense of the company.

And how many employees did the company have? As on March 31, 2015, it had 1,533 employees. The number of employees as on March 31, 2013, was 1,832.

This basically means that the government chose to run a loss of Rs 933 crore in 2014-2015, just so that 1,500 people continue to have a government job. By keeping Hindustan Cables and many other such companies alive, the government has gone around wasting the hard earned money of taxpayers over the years.

The good part is that now that it is shutting down, the government will no longer have to bear the losses of the company. The government bears losses of the loss making companies in two forms. One is by putting money into the company every year to keep it going. Or it ultimately has to take on itself the entire debt that the company takes on to keep itself going. And the financial system lends to the company despite it not making any money because it knows ultimately they are lending to the government.

The other good thing that will happen is that the government will end up with a lot of land (on which any public sector enterprise like Hindustan Cable sits). The 2014-2015 annual report of Hindustan Cables points out that the company got land free of cost from state government of West Bengal as well as erstwhile Andhra Pradesh. This land should be returned to the states and can become a part of the land bank that states can use to attract industries.

This is very important given that the land acquisition policy in the country remains a mess. Hence, land from public sector enterprises which are shut down can be an important source of land in the short to the medium term, for a programme like Make in India to take off.

Further, it is important that the government continues with this and shuts down more loss making public sector enterprises in the time to come, especially those companies which haven’t been producing anything for a while.

Take the case of Hindustan Photo Films Manufacturing Company Ltd. Between 2004-2005 and 2014-2015, the company had accumulated losses of Rs 12,432 crore.

In 2014-2015, the company incurred total losses of Rs 2,164 crore. It was fourth in the list of the ten largest loss making public sector enterprises. In fact, it has constantly been the list of the ten largest loss-making public sector enterprises since 2004-2005.

YearLosses (in Rs crore)

Source: Public Sector Enterprises SurveyThe funny thing is that the company was referred to the Board for Industrial and Financial Reconstruction (BIFR) under the terms of the provisions of Sick Industrial Companies (Special provisions) Act, 1985, in October 1995.

Interestingly, the BIFR had confirmed its opinion for winding up the Company in an order in January 2003. This company has continued to exist and accumulate losses as well as debt. The total debt of the company as on March 31, 2013, had stood at Rs 7,692 crore. This debt had been taken on in order to ensure that the company continues to operate despite making losses.

As in case of Hindustan Cables, the total production of the company had more or less collapsed: During 2012-2013(the latest annual report that I could find) the total production of the company stood at Rs 3.6 crore. The sales had stood at Rs 3.7 crore. Now, imagine who in their right minds would run a company with sales of under Rs 4 crore, which ends up with losses of more than Rs 1,500 crore, during the course of the year.

The most obvious explanation could have been that these losses helped people continue to have jobs. So how many employees does Hindustan Photo Films employ? As of March 31, 2013, it employed 687 individuals. This had fallen to 348 by March 31, 2015.

What does this mean? The government chose to run a loss of greater than Rs 2,164 crore in order to keep 348 people employed. Of course, all the money being spent is not going towards employee salaries. The biggest expense of such companies is paying the interest on the debt that they have accumulated over the years. In order to pay this interest, they need to take on more debt. A perfect Ponzi scheme, if ever there was one.

When companies borrow to survive their structure becomes akin to that of a Ponzi scheme. They survive by borrowing and then using that money to pay off the interest on outstanding debt as well as debt that needs to be repaid. In case of government companies this can go on endlessly given that the lending is ultimately backed by the government.

To conclude, it’s about time that along with Hindustan Cables, the government shut down Hindustan Photo Films and many other such Ponzi schemes that it has been running for a while.

The column originally appeared in Vivek Kaul’s Diary on October 5, 2016

Dying in Vain: Sabka Badla Lega Tera Faijal…



In the movie Gangs of Wasseypur directed by Anurag Kashyap, Nawazuddin Siddiqui, plays a character called Faizal (but pronounced Faijal). In the movie, Faizal is shown to be doped all the time, even though he is a part of a mafia family.

The story of the movie is set around the coal mafia in Dhanbad in Jharkhand.

The rival mafia family kills Faizal’s father and elder brother. Faizal promises to avenge their death and tells his mother: “sabka badla lega re tera faijal (your Faijal will avenge everyone’s death).” Though no one takes Faizal seriously when he says this, he eventually does avenge the deaths of his father and brother, and is killed in the process.

In avenging his father’s and brother’s death, Faizal essentially shows the ‘Our Boys Didn’t Die in Vain’ syndrome. This syndrome is seen in several areas of life including wars.

Yuval Noah Harari explains this in the context of Italy in Homo Deus—A Brief History of Tomorrow. In 1915, Italy entered the First World War with the aim of liberating two territories held ‘unjustly’ by the Austro-Hungarian Empire. The Italian politicians gave fiery speeches motivating thousands of Italians to join the Army and fight. Caught up in the emotion of the moment, Italians thought it would be a walkover.

As Harari writes: “It was anything but. The Austro-Hungarian empire held a strong defensive line…The Italians hurled themselves against the line in eleven gory battles…In the first battle they lost 15,000 men. In the second battle they lost 40,000 men. In the third battle they lost 60,000…By the end of the war, almost 700,000 Italian soldiers were killed, and more than a million were wounded.”

In fact, after losing the first of the eleven battles, the Italian politicians had a choice of admitting their mistake and signing a peace treaty. If they had signed the peace treaty it would have meant admitting that those who had died in the battle, had died in vain. As Harari writes: “How could go the politicians go to the parents, wives and children of 15,000 dead Italian soldiers, and tell them: ‘Sorry, there has been a mistake…But your Giovanni died in vain, and so did your Marco.’”

The other option was to say that Giovanni, Marco and everyone else who had died were heroes, who did not die fighting in vain and continue fighting. Over and above the politicians telling the parents that their children had died in vain, it is even more difficult for parents to admit that their sons had died in vain fighting on the battlefront. The same stands true for soldiers who were crippled but did not die. So the Italians continued fighting and ultimately ended up with Benito Mussolini and his fascists at the top. This ultimately led to the Second World War.

Wars and mafia are not the only places where Our Boys Didn’t Die in Vain’ syndrome,’ is seen. It is seen in various other areas of life as well. As Harari writes: “Not only governments fall into this trap.” The economists call it the sunk-cost effect or to put it simply, the escalation of commitment. It is often seen in the form of companies holding on to floundering projects.

As Daniel Kahneman writes in Thinking, Fast and Slow: “The escalation of commitment to failing endeavours is a mistake from the perspective of the firm but not necessarily from the perspective of the executive who “owns” a floundering project. Cancelling the project will leave a permanent stain on the executive’s record, and his personal interests are perhaps best served by gambling further with the organisation’s resources in the hope of recouping the original investment—or at least in an attempt to postpone the day of reckoning.”

Other than CEOs hanging on to projects, it also leads to people hanging “too long in poor jobs” as well as “unhappy marriages”. As Harari explains it, people “would much prefer to go on suffering in the future, just so it won’t have to admit that our past suffering was devoid of all meaning.”

The column originally appeared in the Bangalore Mirror on October 5, 2016