How Trustworthy are the Bad Loans Numbers of Banks?

The Reserve Bank of India (RBI) in the Financial Stability Report (FSR) released in January had said that by September, the bad loans of banks, under a baseline scenario, could shoot up to 13.5% of their total loans. In September 2020, the bad loans rate of banks had stood at 7.5%. Bad loans are largely loans, which haven’t been repaid for a period of 90 days or more.

If the economic scenario were to worsen into a severe stress scenario, the bad loans could shoot up to 14.8% of the loans. For public sector banks, the rate could go up to 16.2% under a baseline scenario and 17.8% in a severe stress one.

What this meant was that the RBI expected the overall bad loans of banks to shoot up massively in the post-covid world, even more or less doubling from 7.5% to 14.8%, under a severe stress scenario.

A past reading of the RBI forecasts suggests that in an environment where bad loans are going up, they typically end up at levels which are higher than the severe stress level predicted by the RBI.

Given all this, there should be enough reason for worry on the banking front. But as things are turning out the dire predictions of the RBI are still not visible in the numbers. The quarterly results of a bunch of banks for the period October to December 2020 have been declared and it must be said that the banks look to be doing decently well.

In a research note, CARE Ratings points out that the bad loans rate of 30 banks which form the bulk of the Indian banking system (including the 12 public sector banks, IDBI Bank and the big private banks), stood at 7.01% as of December 2020. The rate had stood at 8.72% as of December 2019 and 7.72% as of September 2020.

In fact, when it comes to public sector banks, the bad loans rate has improved from 11.22% as of December 2019 to 9.01% as of December 2020 (This calculation includes IDBI Bank as well, which is now majorly owned by the Life Insurance Corporation of India and not the union government, and hence is categorised as a private bank).

When it comes to private banks ( a sample of 17 banks), the bad loans rate has improved from 4.87% as of December 2019 to 3.49% as of December 2020.

On the whole, these thirty banks had bad loans amounting to Rs 7.38 lakh crore on loans of Rs 105.37 lakh crore, leading to a bad loans rate of a little over 7%. Do remember, the RBI’s baseline forecast for September 2021 is 13.5%. Hence, things should have been getting worse on this front, but they seem to be getting better.

What’s happening here? The Supreme Court in an interim order dated September 3, 2020, had directed the banks that loan accounts which hadn’t been declared as a bad loan as of August 31, shall not be declared as one, until further orders.

This has essentially led to banks not declaring bad loans as bad loans. Nevertheless, the banks are declaring what they are calling proforma slippages or loans which would have been declared as bad loans but for the Supreme Court’s interim order.

A look at the results of banks tells us that even these slippages aren’t big. The proforma slippages of the State Bank of India between April and December 2020, stood at Rs 16,461 crore, which is small change, given that the bank’s total advances stand at Rs 24.6 lakh crore. When it comes to the Punjab National Bank, the total proforma slippages were at Rs 12,919 crore between April to December 2020.

Similarly, when we look at other banks, the proforma slippages are present but they are not a big number. An estimate made by the Mint newspaper suggests that India’s ten biggest private banks have proforma slippages amounting to around Rs 42,000 crore.

The 30 banks in the CARE Ratings note had total bad loans of Rs 7.38 lakh crore or a rate of 7.01 %. If this has to reach anywhere near, 13.5-14.8% as forecast by the RBI, the overall bad loans need to nearly double or touch around Rs 14 lakh crore.

The initial data doesn’t bear this out. As the RBI said in the FSR, “[With] the standstill on asset classification… the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolios.”

Hence, the situation will only get clearer once the Supreme Court decision comes in and the banks need to mark bad loans as bad loans. While banks are declaring proforma slippages, it could very well be that the Supreme Court interim order along with restructuring schemes announced by the RBI and the fact the Insolvency and the Bankruptcy Code remains suspended, have led to a situation where they are under-declaring these numbers.

This is not the first time something like this will happen. Around a decade back in 2011, Indian banks had started accumulating bad loans on the lending binge carried out by them between 2004 and 2010, but they didn’t declare these bad loans as bad loans immediately.

Only after a RBI crackdown and an asset quality review in mid 2015, did the banks start declaring bad loans as bad loans. There is no reason to suggest that banks are behaving differently this time around.

It is important that the same mistake isn’t made all over again. Hence, the RBI should carry out an asset quality review of banks(and non-banking finance companies) and force them to come clean on their bad loans.

A problem can only be solved once it has been identified as one.

The article originally appeared in the Deccan Herald on February 14, 2021.

Indian Banks Will Have Rs 17-18 Lakh Crore Bad Loans By September

The Reserve Bank of India (RBI) publishes the Financial Stability Report (FSR) twice a year, in June and in December. This year the report wasn’t published in December but only yesterday (January 11, 2021).

Media reports suggest that the report was delayed because the government wanted to consult the RBI on the stance of the report. For a government so obsessed with controlling the narrative this doesn’t sound surprising at all.

Let’s take a look at the important points that the FSR makes on the bad loans of banks and what does that really mean. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more.

1) The bad loans of banks are expected to touch 13.5% of the total advances in a baseline scenario. Under a severe stress scenario they are expected to touch 14.8%. These are big numbers given that the total bad loans as of September 2020 stood at 7.5% of the total advances. Hence, the RBI is talking of a scenario where bad loans are expected to more or less double from where they are currently.

2) Under the severe stress scenario, the bad loans of public sector banks and private banks are expected to touch 17.6% and 8.8%, respectively. This means that public sector banks are in major trouble again.

3) In the past, the RBI has done a very bad job of predicting the bad loans rate under the baseline scenario, when the bad loans of the banking system were going up.

Source: Financial Stability Reports of the RBI.
*The actual forecast of the baseline scenario was between 4-4.1%

If we look at the above chart, between March 2014 and March 2018, the actual bad loans rate turned out to be much higher than the one predicted by the RBI under the baseline scenario. This was an era when the bad loans of the banking system were going up year on year and the RBI constantly underestimated them.

4) How has the actual bad loans rate turned out in comparison to the bad loans under severe stress scenario predicted by the RBI?

Source: Financial Stability Reports of the RBI.
*The actual forecast of the baseline scenario was between 4-4.1%

In four out of the five cases between March 31, 2014 and March 31, 2018, the actual bad loans rate turned out higher than the one predicted by the RBI under a severe stress scenario. As Arvind Subramanian, the former chief economic advisor to the ministry of finance, writes in Of Counsel:

“In March 2015, the RBI was forecasting that even under a “severe stress” scenario— where to put it colourfully, all hell breaks loose, with growth collapsing and interest rates shooting up—NPAs [bad loans] would at most reach about Rs 4.5 lakh crore.”

By March 2018, the total NPAs of banks had stood at Rs 10.36 lakh crore.

One possible reason can be offered in the RBI’s defence. Let’s assume that the central bank in March 2015 had some inkling of the bad loans of banks ending up at around Rs 10 lakh crore. Would it have made sense for it, as the country’s banking regulator, to put out such a huge number? Putting out numbers like that could have spooked the banking system in the country. It could even have possibly led to bank runs, something that the RBI wouldn’t want.

In this scenario, it perhaps made sense for the regulator to gradually up the bad loans rate prediction as the situation worsened, than predict it in just one go. Of course, I have no insider information on this and am offering this logic just to give the country’s banking regulator the benefit of doubt.

5) So, if the past is anything to go by, the actual bad loans of banks when they are going up, turn out to be much more than that forecast by the RBI even under a severe stress scenario. Hence, it is safe to say that by September 2021, the bad loans of banks will be close to 15% of advances, a little more than actually estimated under a severe stress scenario.

This will be double from 7.5% as of September 2020. Let’s try and quantify this number for the simple reason that a 15% figure doesn’t tell us about the gravity of the problem. The total advances of Indian banks as of March 2020 had stood at around Rs 109.2 lakh crore.

If this grows by 10% over a period of 18 months up to September 2021, the total advances of Indian banks will stand at around Rs 120 lakh crore. If bad loans amount to 15% of this we are looking at bad loans of Rs 18 lakh crore. The total bad loans as of March 2020 stood at around Rs 9 lakh crore, so, the chances are that bad loans will double even in absolute terms. If the total advances grow by 5% to around Rs 114.7 lakh crore, then we are looking at bad loans of around Rs 17.2 lakh crore.

6) The question is if this is the level of pain that lies up ahead for the banking system, why hasn’t it started to show as yet in the balance sheet of banks. As of March 2021, the RBI expects the bad loans of banks to touch 12.5% under a baseline scenario and 14.2% under a severe stress scenario. But this stress is yet to show up in the banking system.

This is primarily because the bad loans of banks are currently frozen as of August 31, 2020. The Supreme Court, in an interim order dated September 3, 2020, had directed the banks that loan accounts which hadn’t been declared as a bad loan as of August 31, shall not be declared as one, until further orders.

As the FSR points out:

“In view of the regulatory forbearances such as the moratorium, the standstill on asset classification and restructuring allowed in the context of the COVID-19 pandemic, the data on fresh loan impairments reported by banks may not be reflective of the true underlying state of banks’ portfolios.”

The Supreme Court clearly needs to hurry up on this and not keep this hanging.

7) Delayed recognition of bad loans is a problem that the country has been dealing with over the last decade. The bad loans which banks accumulated due to the frenzied lending between 2004 and 2011, were not recognised as bad loans quickly enough and the recognition started only in mid 2015, when the RBI launched an asset quality review.

This led to a slowdown in lending in particular by public sector banks and negatively impacted the economy. Hence, it is important that the problem be handled quickly this time around to limit the negative impact on the economy.

8) Public sector banks are again at the heart of the problem. Under the severe stress scenario their bad loans are expected to touch 17.6% of their advances. The sooner these bad loans are recognised as bad loans, accompanied with an adequate recapitalisation of these banks and adequate loan recovery efforts, the better it will be for an Indian economy.

9) At an individual level, it makes sense to have accounts in three to four banks to diversify savings, so that even if there is trouble at one bank, a bulk of the savings remain accessible. Of course, at the risk of repetition, please stay away from banks with a bad loans rate of 10% or more.

To conclude, from the looks of it, the process of kicking the bad loans can down the road seems to have started. There is already a lot of talk about the definition of bad loans being changed and loans which have been in default for 120 days or more, being categorised as bad loans, against the current 90 days.

And nothing works better in the Indian system like a bad idea whose time has come. This is bad idea whose time has come.

 

The Rs 20 Lakh Crore Bad Loans Problem of Indian Banks Hasn’t Gone Away

On December 29, 2020, the Reserve Bank of India (RBI) released the Report on Trend and Progress of Banking in India.

Like every year, the report is a treasure trove of information, especially for people like me who like to closely track the aggregate banking scene in India.

Sadly, most of this important information barely made it to the mainstream media, this, despite the fact that the health of the country’s banking sector impacts almost all of us. (This is one reason why I need your continued support).

Among other things, the report discusses the issue of the bad loans of banks in great detail. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more. They are also referred to as non-performing assets or NPAs.

Let’s take a look at this issue pointwise.

1) The total bad loans of banks (public sector banks, private banks, foreign banks and small finance banks) as of March 31, 2020 stood at around Rs 8,99,802 crore. This is the lowest since 2017-18. The following chart plots the bad loans of banks over the years.

Source: Reserve Bank of India.

Despite this fall, the Indian banking sector on a whole continues to remain in a mess. We shall look at the reasons in this piece.

2) The total amount of loans written off by banks has steadily been going up over the years. In 2019-20 it peaked at Rs 2,37,876 crore. The following chart lists out the loans written off by banks over the years.

Source: Reserve Bank of India.

Basically, loans which have been bad loans for four years (that is, for one year as a ‘substandard asset’ and for three years as a ‘doubtful asset’) can be dropped from the balance sheet of banks by way of a write-off. In that sense, a write-off is an accounting practise.

Of course, before doing this, a 100 per cent provision needs to be made for a bad loan which is being written-off. This means a bank needs to set aside enough money over four years in order to meet the losses on account of a bad loan.

Also, this does not mean that a bank has to wait for four years before it can write-off a loan. If it feels that a particular loan is unrecoverable, it can be written off before four years.

So, does that mean that once a loan is written off it’s gone forever and is no longer recoverable? In India things work a little differently. In fact, almost all the bad loans written off are technical write-offs.

The RBI defines technical write-offs as bad loans which have been written off at the head office level of the bank, but remain as bad loans on the books of branches and, hence, recovery efforts continue at the branch level. If a bad loan which was technically written off is partly or fully recovered, the amount is declared as the other income of the bank. Having said that, the rate of recovery of loans written-off over the years, has been abysmal at best.

Now getting back to the issue at hand. The bad loans of banks as of March 31, 2020, have come down to some extent due to write-offs. As the Report on Trend and Progress of Banking in India points out: “The reduction in NPAs during the year was largely driven by write-offs.” Interestingly, the RBI offers the same reason for bad loans coming down in the years before 2019-20 as well.

Let’s try examining the above logic in a little more detail. The bad loans or NPAs of banks as of April 1, 2019, stood at Rs 9,15,355 crore. During the course of 2019-20, banks wrote off loans worth Rs 2,37,876 crore. Nevertheless, as of March 31, 2020, the bad loans of banks had come down to Rs 8,99,803 crore.

If we subtract the loans written off during 2019-20 from the overall bad loans of banks as of April 1, 2019, the bad loans as of March 31, 2020, should have stood at Rs 6,77,479 crore (Rs 9,15,355 crore minus Rs 2,37,876 crore). But as we see they are actually at Rs 8,99,802 crore.

What has happened here? What accounts for the significant difference? Banks have accumulated fresh bad loans during the course of the year. The net fresh bad loans (fresh bad loans accumulated during the year minus reduction in bad loans) during 2019-20 stood at Rs 2,22,323 crore. Once this added to Rs 6,77,479 crore, we get Rs 8,99,802 crore, or the bad loans as of March 31, 2020.

The point to be noted here is that banks on the whole have accumulated fresh bad loans of more than Rs 2 lakh crore during 2019-20. This is a reason to worry. It tells us that the bad loans problem of Indian banks hasn’t really gone anywhere. It is alive and kicking, unlike what many bankers, economists, India equity strategists and journalists, have been trying to tell us. Many borrowers continue to default on their loans.

The net fresh bad loans accumulated in 2018-19 had stood at Rs 1,34,738 crore. This tells us that there was a huge jump in the accumulation of fresh bad loans in 2019-20. The current financial year will see a further accumulation of bad loans due to the covid-pandemic.

3) In a February 2017 interview to Dinesh Unnikrishnan of Firstpost, Dr KC Chakrabarty, a former deputy governor of the RBI and a veteran public sector banker, had put the bad loans number of Indian banks at Rs 20 lakh crore.

As he had said:

“I’ll put the figure around Rs 20 lakh crore…One should include all troubled loans including reported bad loans, restructured assets, written off loans and bad loans that are not yet recognised.”

The trouble was not many people took Chakrabarty seriously at that point of time. Nevertheless, the Rs 20 lakh crore number doesn’t seem far-fetched at all. As mentioned earlier, the bad loans number as of March 31, 2020, stood at Rs 8,99,802 crore.

Between 2014-15 and 2019-20, the total bad loans written off by banks was Rs 8,77,856 crore. We are taking this particular time period simply because in mid 2015 the RBI launched an asset quality review and forced banks to recognise bad loans as bad loans. Up until then the banks had been using various tricks to kick the bad loans can down the road.

If we add, the bad loans as of March 2020 to bad loans written off between 2014-15 and 2019-20, we get Rs 17,77,658 crore. What does this number represent? It represents the total bad loans, the Indian banks have managed to accumulate between 2014-15 and 2019-20. And it is very close to the Rs 20 lakh crore number suggested by Chakrabarty.

Of course, this calculation does not take into account the loans which are bad loans but have not yet been recognised as bad loans. Former RBI Governor Urjit Patel in his book Overdraft—Saving the Indian Saver writes:

“In February 2020, ‘living dead’ borrowers in the commercial real-estate sector – under a familiar guise (‘a ghost from the past’, if you will) viz., ad hoc ‘restructuring’ – have been given a lifeline. It is estimated that over one-third of loans to builders are under moratorium.”

Professor Ananth Narayan of the S. P. Jain Institute of Management and Research, writing in the Mint in June 2020, said: “Banking NPA recognition remains incomplete… For a while now, RBI has allowed banks to postpone NPA recognition for some of the over Rs 8 lakh crore of MSME, MUDRA and commercial real estate loans.” The situation could only have worsened post the spread of the covid-pandemic.

If we take this into account, the bad loans of Indian banks over the last five years have amounted to much more than Rs 20 lakh crore. In that sense, Dr Chakrabarty has had the last laugh. As Chakrabarty had said in the Firstpost interview: “Unless this portion is recognised first, there will be no solution to the bad loan problem.”

Or to put it simply, how do you solve a problem without recognising that it exists.

10 Things Women Can Do to Manage Personal Finances Better in 2021

Aage aage wo chale peeche saari duniya
din na dekhe raat na dekhe peeche padi hai duniya
aur nahi koi aur nahi wo to hai rupaiya
gol gol chaand sa rupaiya
kaisa hai ye khwab sa rupaiya

— Visheshwar Sharma, Kalyanji Anandji, Kishore Kumar and Surendra Mohan, in Hiraasat.

Okay, the headline was clickbait.

But now that I have your attention I have a few important things to share. I make a living by writing regularly on economics and finance. But this isn’t how it always was.

For my first couple of years in journalism, I largely wrote on personal finance topics. It took me a couple of years to figure out that between the product sellers and the personal finance writers, the subject was made needlessly complicated.

The trick wasn’t to try and understand every new product/idea that hit the market, which is what personal finance pages in newspapers and personal finance websites and magazines cater to, because they need to fill up space, so that they can gather advertisements against that space. Of course, personal finance writers need to keep writing about newer things and same things in newer ways, to keep their jobs.

When it comes to companies selling personal finance products, they are largely in the business of raising money and not necessarily managing it well

Hence, what is more important is to understand the broader principles of the subject and then stick to them over a period of time.

In the last fifteen years I have ended up advising more women on personal finance issues than men. In my limited experience, women seem to be more interested in understanding the nuances, the men typically play know it all when it comes to personal finance.

In this piece, I will elaborate on principles I think every woman should follow when it comes to managing her money and personal finances. (In fact, most of these principles can be followed by men as well, but then they know it already).

If you aren’t following these principles, 2021 is just about here and now is as good a time to start as any.

Here we go:

1) Save for the sake of saving. This is a very simple principle but many women I have come across, just don’t get it. They want to save for their next holiday, the next diamond ring, the next home, the next car, the children who aren’t there yet, the next whatever

In fact, Morgan Housel makes this point beautifully in his recent book The Psychology of Money: “Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.”

Like when the covid pandemic hit India in late March, people who had saved money for the sake of saving and had money in the bank account, were able to handle the situation in a much better way. If you lost your job and had money in the bank account you didn’t have to take on the first new job that came along. You could wait for something better.

As Housel puts it: “Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”

Further, if you save for the sake of saving and have money in the bank, you will be able to make the decisions, right or wrong, you want to make in life, and which might even mean not being pressurised by your family to get married to the next guy they discover on Shaadi.com.

If this isn’t important I don’t know what is. Hence, being financially independent is very very important and that can only happen if you save for the sake of saving.

In fact, as Housel puts it:

“We can leave aside rich, but independence has always been my personal financial goal. Chasing the highest returns or leveraging my assets to live the most luxurious life has little interest to me. Both look like games people do to impress their friends, and both have hidden risks. I mostly just want to wake up every day knowing my family and I can do whatever we want to do on our own terms. Every financial decision we make revolves around that goal.”

 

This should be the ultimate goal of saving and money in the bank account should not be a signalling effect for the society at large.

2) If you work for a company, be aware of how your salary is structured. Too many companies use the cost to company (CTC) approach to take their employees for a ride. If you don’t understand the items that make up your salary, ask around, Google, do whatever is needed to understand them. I come across way too many women who work very hard on their job, but have no idea of their salary structure (This is not to even remotely suggest that men have it all figured out). If you have ESOPs as a part of your CTC, know when they will vest and when you can sell them. The same when it comes to the soft loans that you can take from the company. It’s slightly difficult to understand this, but it’s not rocket science.

3)  I think this is the most important point that I will make in this piece. Way too many women I know, leave the managing of their finances to their fathers (a horrible horrible idea because they will make you buy LIC policies), spouses (might end up taking too much risk than you prefer) or boyfriends (you might just breakup, who knows).

I mean if you work so hard to earn the money that you do, why not spend some time to figure out how to manage it well. As I said earlier, money in the bank, helps us make the decisions that we want to. If you can spend a week planning a ten-day holiday that you take during the course of a year, I am sure you can spend a few days understanding how to manage the money you work so hard to earn through the year.

4) This is a tricky point and hasn’t gone down too well with most women I have shared it with. Don’t have all your money in joint bank accounts with your spouse (works for the husbands as well). I am not remotely trying to suggest that if things don’t work out between you guys, he will cheat you on the money front (he may, but then who am I to suggest that). But untangling these things can be quite a pain.

So, it makes sense to have one joint account for the shared expenses, but beyond that have your money in your bank account. (Believe me, if things don’t work out, you are going to thank me forever for this).

5) This is another tricky point. If your father/husband/boyfriend/brother manages your money, be aware of where that money is parked. Be aware of the loans your husband has taken on. Again, I am saying this from experience. Many women just tend to be totally unaware on this front and then one day when the father dies, the husband leaves or the boyfriend breaks up, the reality of the situation suddenly hits them. Just getting a bank account shut after someone’s death can be a huge pain, if you are unaware of the details.

6) Many women don’t like the idea of managing their money because they think there is a lot of maths involved in it (Again, this is not to suggest that men understand the maths). It’s just basic fifth standard maths, which is not difficult to understand at all.

7) Make sure that you are making full use of the tax deductions available to you as a married couple. (Again, the husband may have no idea, doesn’t mean you also don’t).

8) Diamond jewellery looks great on you and please wear it by all means but don’t go about buying diamonds all the time. It’s a bad idea. Selling diamonds can be a difficult business in case of an emergency. (Don’t believe me, just Google).

9) If you are starting out and don’t know how to go about managing your money, just do a recurring deposit with a bank to start with. It won’t give you a great return but some money will start accumulating and some money is better than no money. Also, don’t buy an insurance policy unless your family is dependent on you or you have outstanding liabilities.

10) And finally, since we are about 2021, do remember that sometimes return of capital is more important than return on capital. 2021 will be that kind of year. Manage your money accordingly.

To conclude, these points go beyond doing the basic things, like investing regularly over a long period of time to ensure that you end up making decent returns and not necessarily the highest returns, not having all your investments in one asset class (diversification), buying a house to live in and thinking very carefully about buying another house, not over-leveraging yourself and not making any investment decisions which will keep you awake at night. Nothing is worth ruining a good night’s sleep.

Why RBI’s Monetary Policy Has Been a Bigger Flop Than Bombay Velvet

Mere paas kothi hai na car sajni,
Kadka hai tera dildar sajni.
— Rajkavi Inderjeet Singh Tulsi, Ravindra Jain, Kishore Kumar, Asha Bhonsle and Ashok Roy, in Chor Machaye Shor.

Okay, I didn’t have to wait for the Reserve Bank of India’s monetary policy declared today, to write this piece. I could have written this piece yesterday or even a month back. But then the news cycle ultimately determines the number of people who end up reading what I write, and one can’t possibly ignore that.

A few hours back, the Monetary Policy Statement was published by the RBI, after the monetary policy committee (MPC) met on 2nd, 3rd and 4th December. The MPC of the Reserve Bank of India (RBI) has the responsibility to set the repo rate, among other things. The repo rate is the interest rate at which the RBI lends to banks, and which to some extent determines the interest rates set by commercial banks for the economy as a whole.

The MPC has been driving down the repo rate since January 2019, when the rate was at 6.5%. The rate had been cut to 5.15% by February 2020, around the time the covid pandemic struck.

By May 2020, the MPC had cut the repo rate further by 115 basis points to an all-time low of 4%. One basis point is one hundredth of a percentage. The idea behind the cut was two-fold.

In the aftermath of the covid pandemic as the economic activity crashed, the tax collections of the government crashed as well, leading to a situation where the government’s borrowing requirement jumped from Rs 7.8 lakh crore to Rs 12 lakh crore.

The massive repo rate cut would help the government to borrow more at lower interest rates. The yield or the return on a ten-year government of India bond in early February was at 6.64%. Since then it has fallen to around 5.89% as of December 4. The government of India borrows by selling bonds. The money that it raises helps finance its fiscal deficit or the difference between what it earns and what it spends.

The second idea was to encourage people to borrow and spend more and businesses to borrow and expand, at lower interest rates. Take a look at the following chart. It plots the average interest at which banks have given out fresh loans over the years.

Source: Reserve Bank of India.

The data on average interest at which banks have given out fresh loans is available for a period of a little over six years, starting from September 2014 and up to October 2020. It can be seen from the above chart that the interest rates in the recent months, have been the lowest in many years. But has that led to an increase in lending by banks, that’s the question that needs to be answered?

As of October 2020, the total outstanding non-food credit of banks by economic activity, had gone up by 5.6% in comparison to October 2019. Banks give loans to the Food Corporation of India and other state procurement agencies to buy rice, wheat and a few other agricultural products directly from farmers. Once we subtract these loans out from the overall loans given by banks that leaves us with non-food credit by economic activity.

Also, it needs to be mentioned here that this is how banking data is conventionally reported, in terms of the total outstanding loans of banks.

When you compare this with how other economic data is reported, it’s different. Let’s take the example of passenger cars.

When passenger car sales are reported, what is reported is the number of cars sold during a particular month and not the total number of cars running in India at that point of time. In case of banks, precisely the opposite thing happens.

What is conventionally reported is the total outstanding loans at any point of time and not the loans given incrementally during a particular period. So, the total outstanding non-food credit of Indian banks by economic activity, as of October end 2020 stood at Rs 92.13 lakh crore. This increased by 5.6% over October 2019.

The way this data is reported does not tell us the gravity of the situation that the banks are in. That comes out when we look at just incremental loans from one year back. The way to calculate this is to take total outstanding loans as of October 2020 and subtract that from outstanding loans of banks as of October 2019. The difference is incremental loans for October 2020. Similarly, the calculation can be done for other months as well.

Let’s take a look incremental loans data over the last three years.

111

As can be seen the above chart, the incremental loans every month in comparison to the same month last year, have been falling since late 2018, just a little before the RBI started cutting the repo rate. In October 2020, they stood at Rs 4.83 lakh crore, a three-year low.

What does this mean? It means that as the MPC of the RBI has gone about cutting the repo rate, the incremental loans given by banks have gone down as well. This is the exact opposite of what economists and central banks expect, that as interest rates fall, borrowing should go up.

And this has been happening from a time before the covid-pandemic struck. Covid has only accentuated this phenomenon. This also leads to the point I make often that for people to borrow more, just lower interest rates are not enough.

The main point that encourages people and businesses to borrow more is the confidence in their economic future. While the government will try and blame India’s currently economic problems totally on covid, it is worth mentioning here that India’s economic growth has seen a downward trend since March 2018. The economic growth for the period January to March 2018 had stood at 8.2% and has been falling since, leading to a lesser confidence in the economic future, both among individuals and corporates.

In fact, if we compare the situation between March 27, 2020, when covid first started spreading across India, and November 6, 2020, the total outstanding non-food credit of banks has grown by just Rs 2,221 crore (yes, you read that right, and this is not a calculation error).

During the same period, the total deposits of banks have grown by Rs 8.13 lakh crore or 6%. The incremental credit deposit ratio between March 27 and November 6, is just 0.27%. We can actually assume it be zero, given that it is so close to zero. Al these deposits have primarily been invested in government bonds.

Basically, on the whole, the banks have been unable to lend any of the deposits they have got from the beginning of this financial year. Only one part of banking is in operation. Banks are borrowing, they are not lending.

What does this tell us? It tells us that banking activity in the country has collapsed post covid, despite the RBI cutting the repo rate to an all-time low-level of 4%, where it’s 361 basis points lower than the latest rate of retail inflation of 7.61%. Other than cutting the repo rate, the RBI has also printed a lot of money and pumped it into the financial system, to drive down interest rates.

But despite that people and businesses are not borrowing. RBI’s monetary policy has been an even bigger flop than Anurag Kashyap’s Bombay Velvet, Raj Kapoor’s Mera Naam Joker and Satish Kaushik’s Roop ki Rani Choron ka Raja. (I name three different films so that readers of different generations all get the point I am trying to make here).

In the monetary policy statement released a few hours back, there is very little mention of this, other than:

“A noteworthy development is that non-food credit growth accelerated and moved into positive territory for the first time in November 2020 on a financial year basis .”

The governor’s statement has some general gyan like this:

“In response to the COVID-19 pandemic, the Reserve Bank has focused on resolution of stress among borrowers, and facilitating credit flow to the economy, while ensuring financial stability.”

No explanations have been offered on why the monetary policy has flopped. The current dispensation at India’s central bank is getting used to behaving like the current government.

It is important to understand here why monetary policy has been such a colossal flop this year. The answer lies in what the British economist John Maynard Keynes called the paradox of thrift. When a single individual saves more, it makes sense, as he prepares himself to face an emergency where he might need that money.

But when the society as a whole saves more, as it currently is, that causes a lot of damage because one’s man spending is another man’s income. As we have seen bank deposits during this financial year have gone up Rs 8.13 lakh crore or 6%. On the whole, people are cutting down on their spending and saving more for a rainy day.

The psychology of a recession at play and not just among those people who have been fired from their jobs or seen a fall in their income. It is obvious that such people are cutting down on their spending. But even those who haven’t faced any economic trouble are doing so.

They are doing so in the fear of seeing a fall in their income or losing their job and not being able to find a new one. When the individuals are cutting down on their spending, it doesn’t make much sense for businesses to borrow and expand. In fact, the overall bank lending to the industry sector has contracted by Rs 4,624 crore between October 2019 and October 2020.

Typically, in a situation like this, when the private sector is not in a position to spend, the government of the day steps in. The trouble is that the current government is not in a position to do so as tax revenues have collapsed this year. There other fears at play here as well.

In the midst of all this, Dinesh Khara, the chairman of the State Bank of India told the Business Standard, that bank lending rates “have actually bottomed”. Given that banks have barely lent anything this year, it makes me sincerely wonder what Mr Khara has been smoking. Clearly, it makes sense to avoid that.

To conclude, monetary policy should not get the kind of attention it gets in the business media, simply because, it is dead, and it has been dying for a while. The trouble is, there are one too many banking correspondents and even more central bank watchers, including me, who need to make a living.

And very few among us, are likely to ask the most basic question—why monetary policy is not working.

Le jayenge le jayenge dilwale dulhaniya le jayenge
— Rajkavi Inderjeet Singh Tulsi, Ravindra Jain, Kishore Kumar, Asha Bhonsle and Ashok Roy, in Chor Machaye Shor.