Category: Banking | Page 13

3 February, 2016

SBI’s FlexiPay Home Loan Basically Looks Like a Marketing Gimmick

In yesterday’s column I discussed why the State Bank of India(SBI) has launched the FlexiPay home loan. This home loan allows a borrower to borrow up to 120% of what he would have been able to do in the normal scheme of things.

Further, the borrower has the option to pay only interest on the home loan for the first three to five years. The EMI, which will lead to the principal being repaid as well, kicks in only after that.

The question to ask here is, how much will this benefit the borrower. Or is this just a marketing gimmick which the country’s largest bank has come up with in order to issue more home loans. It is clear that SBI wants to give out more home loans, given that they have a very low default rate in comparison to the other kinds of home loans that the bank gives out.

Let’s try and understand whether FlexiPay home loan is a marketing gimmick or does it ‘really’ benefit the borrower. Let’s take the example of a borrower, who in the normal scheme of things, is eligible to take on a loan of Rs 40 lakh. While this number may seem very low to those who live in metropolitan cities, the average home loan given out by HDFC, the largest housing finance company in the country, is around Rs 23.6 lakh. So a home loan amount of Rs 40 lakh is pretty decent by that comparison.

Getting back to the example. Let’s say a borrower is eligible to take on a loan of Rs 40 lakh. In the case of FlexiPay home loan, he will be eligible for a loan of up to Rs 48 lakh (1.2 times Rs 40 lakh). The interest that SBI charges on its home loan is 9.55% (It’s 9.5% for women).

The interest only option of the FlexiPay home loan allows the borrower just to pay interest on the home loan for the first three to five years. As the SBI press release on FlexiPay home loan points out: “Further, to lower the impact of such additional loan amount on monthly repayments in the form of EMIs, the customers availing Home Loan under ‘SBI FlexiPay Home Loan Scheme’ will also be offered the option of paying only interest during the moratorium (pre-EMI) period of 3 to 5 years, and thereafter, pay moderated EMIs.”

The idea, as SBI puts it, is to give the borrower the option to pay a lower amount every month during the initial years. But is this amount really low? Let’s do some maths to understand this point. I had done this in yesterday’s column as well, but on reading it later, I found that the point did not come out as strongly as it should have.

Let’s say the borrower opts for an interest only option for the first five years. He has taken a loan of Rs 48 lakh, as is allowed under the FlexiPay home loan. An interest of 9.55% would amount to a total payment of Rs 4,58,400 during the course of the year.

This means a monthly payment of Rs 38,200 to service the interest on the loan. If the borrower had taken on a normal home loan, he would have got a home loan of Rs 40 lakh. The maximum tenure of an SBI home loan is 30 years. Hence, the EMI on a Rs 40 lakh, 30-year home loan, at an interest rate of 9.55%, would work out to Rs 33,780. This is lower than the monthly payment of Rs 38,200 that needs to be paid as interest on a Rs 48 lakh home loan, if the borrower opts for the interest only option for the first five years.

So there is clearly no moderation in the payment as SBI claims. And that is primarily because the interest to be paid on the FlexiPay home loan is the same as a normal home loan. If the interest were to be lower, then the interest payment would have been lower as well and the moderation claim would have been true to a certain extent. But in that case the bank would have been taking on more risk as well.

Now let’s flip the situation. If the borrower were paying an EMI of Rs 38,200, what is the loan amount he would be able to service. The maximum tenure of an SBI home loan is 30 years. Hence, paying an EMI of Rs 38,200, for a tenure of 30 years, at an interest of 9.55%, the borrower would be able to service a home loan of Rs 45.23 lakh. The EMI for this loan works to around Rs 38,197.

The loan amount of Rs 45.23 lakh is around 5.8% lower than the loan amount of Rs 48 lakh. Hence, is it worth paying only an interest of Rs 38,200 per month for a Rs 48 lakh home loan, when for the same EMI one could get a loan of Rs 45.23 lakh. And that is the question that any borrower should be asking himself.

SBI will not give the borrower a loan of Rs 45.23 lakh under a normal home loan scheme, given the borrower is eligible only for a loan amounting to Rs 40 lakh. But the bank is willing to give a loan of up to Rs 48 lakh under the FlexiPay home loan scheme.

Hence, the borrower should take this opportunity of taking on a higher loan amount of Rs 45.23 lakh, if the need be, under the FlexiPay home loan scheme. But at the same time ensure that he does not opt for the interest only option but repay an EMI. Why do I say that? If the borrower takes on a loan of Rs 48 lakh and opts for the interest only option, he has to pay an interest of Rs 38,200 per month.

Over a period of five years this amounts to Rs 22.92 lakh, close to half the loan he has borrowed. Further, at the end of five years, not a single paisa of the loan amount has been repaid and he has to start repaying the loan. The borrower will have to repay the loan over a period of the next 25 years. For this, he needs to pay an EMI of Rs 42,104 per month, which is 10.2% more.

Now what would have happened if the borrower had opted to pay an EMI of Rs 38,200 per month on a home loan of Rs 45.23 lakh, and repaid it over thirty years. At the end of five years, he would have repaid around Rs 2.03 lakh of the loan already. In the interest only option, not a single paisa would have repaid. Also, it is worth pointing out here that the difference between a loan of Rs 45.23 lakh and Rs 48 lakh is not huge. Further, when a borrower pays an EMI, the principal amount of the EMI is allowed as a deduction under Section 80C of the Income Tax Act. And this deduction will not be available if interest only option is chosen.

What these numbers tell us very clearly is that the FlexiPay home loan looks more like a marketing gimmick to lure in prospective home loan borrowers. The borrowers are better off opting for the EMI option rather than the interest only option.

The column originally appeared on the Vivek Kaul Diary on February 3, 2016

2 February, 2016

Why SBI is Launching a Home Loan that Caused the Financial Crisis

In August 2015, Arundhati Bhattacharya the Chairman of the State Bank of India (SBI), had suggested that the country’s largest bank be allowed to launch teaser rate home loans. As she had said back then: “In fact, the first suggestion that I made (was) that, for a limited period, home loans could be given at below base rate for the already heavy stock of housing.” Base rate is the minimum interest rate a bank charges to its customers.

The bank had first launched teaser rate home loans in 2009. These loans are essentially home loans in which the interest rate is fixed in the initial years and is lower than the normal floating interest rate on a home loan. The lower interest rate is limited only to the first two-three years, after which the loan is priced at the prevailing interest rate on the home loans. Hence, the EMIs for the borrower during the first few years are lower than they would have been in the normal scheme of things.

Yesterday (i.e. February 1, 2016), SBI went a step further, and launched a home loan in which the monthly payments initially will be even lower than the EMIs paid in case of teaser rate home loans. It launched what it calls the SBI FlexiPay Home Loan.

As the press release of the announcement of this home loan points out: “The new offering, ‘SBI FlexiPay Home Loan’, will enable young working professionals / executives to get higher loan amount compared to their loan eligibility under normal Home Loan schemes. The additional loan amount will help such professionals in acquiring better and spacious living spaces for themselves and their families, taking into account their future needs.”

Hence, anyone applying for a FlexiPay Home Loan will get a higher amount of home loan than his or her loan eligibility would permit under normal circumstances. And there is more to this as well. As the SBI press release points out: “Further, to lower the impact of such additional loan amount on monthly repayments in the form of EMIs, the customers availing Home Loan under ‘SBI FlexiPay Home Loan Scheme’ will also be offered the option of paying only interest during the moratorium (pre-EMI) period of 3 to 5 years, and thereafter, pay moderated EMIs. The EMIs will be stepped-up during the subsequent years.”

So, other than getting a higher loan amount, the loan also comes with the option of the borrower only paying the interest on the loan during the first few years. And this makes things very interesting.

As the SBI press release points out: “Soaring aspiration levels and rising awareness about the impact of quality living spaces on healthy and harmonious living are resulting in our newer generation of working professionals to show greater preference for better and larger homes. But they are constrained from purchasing their dream homes due to the relatively lower income available at early stage of their career.”

Hence, the FlexiPay home loan will essentially allow people buy a home which they otherwise wouldn’t have been able to afford given their current level of income. As SBI puts it, the loan tries to “to bridge the gap between affordability and demand for quality residential spaces in the country”.

There are multiple questions that arise here. Let me try and answer them one by one.

a) Why is SBI doing this? The answer lies in the numbers. The bank like other public sector banks has significantly lower bad loans when it lends to retail consumers than when it lends to corporates. As on September 30, 2015, the bad loans when it came to lending to retail sector (i.e. home loans, auto loans, personal loans etc.) were at 1.03% of the total lending carried out to the sector. This number had been at 1.37% as on September 30, 2014.

In comparison, the bad loans while lending to mid-level corporates were at 10.62%. Bad loans while lending to small and medium enterprises were at 8.72%. Also, while the overall bad loan rate in case of retail loans is 1.03%, it is safe to say that the bad loans rate while giving out home loans would be lower.

One explanation for this lies in the fact that it is easy to unleash legal proceedings (or the threat of) against retail borrowers and get them to pay up than it is to do against corporates. Hence, it makes sense for the bank to give out home loans in comparison to other loans, where recovery is difficult.

In fact, between September 2014 and September 2015, 25% of all domestic lending carried out by the bank was in the form of home loans.

b) Should SBI be doing this? It is clear that SBI wants to give out more home loans. The trouble with the FlexiPay home loan is that it relaxes the lending standards while giving out a home loan. As the press release points out that the loan will help the borrower “to get higher loan amount compared to their loan eligibility under normal Home Loan scheme”.

While this will allow the bank to lend more, relaxing lending standards in order to lend more is not always the best way to expand the loan book. As the SBI press release further says the loan will help “to bridge the gap between affordability and demand for quality residential spaces in the country”.

The function of any bank is to give loans and to give them out to those people and institutions who are likely to return it. It is not the function of a bank to improve the real estate scenario in a country by lowering its lending standards.

Further, in the interest only version of the loan the EMI is likely to jump up once the principal repayment (through the EMI) also kicks in after a period of three to five years. In fact, even after three to five years, when EMIs kick-in, the borrowers will have to “pay moderated EMIs”.

The bank is essentially working with the assumption that the income of the borrower will go up during the period and he will be in a position to pay the higher EMI. But is that likely to be the case?

Let’s try and understand this through an example. The scheme allows for upto 1.2 times higher loan eligibility compared to the loan eligibility under the normal home loan scheme. The loan amount has to be Rs 20 lakh or higher. What this means is that anyone with a loan eligibility of Rs 50 lakh under normal conditions, can take a loan of upto Rs 60 lakh.

Over and above this he can choose only to pay interest on it for the first five years. The current rate of interest on an SBI home loan is 9.55% (9.5% for women). Hence, the monthly payment for the first five years will come to Rs 47,750 (9.55% of Rs 60 lakh divided by 12).

The question is if the borrower chooses to pay this amount as an EMI what loan amount will he be eligible for? SBI offers a tenure of up to 30 years on its home loans. At an interest of 9.55% and a tenure of 30 years, an EMI of Rs 47,750, is good enough to repay a loan of Rs 56.55 lakh, which isn’t very different from Rs 60 lakh. (The EMI for a Rs 56.55 lakh home loan to be repaid over 30 years and at an interest of 9.55% comes to Rs 47,757).

The trouble is the eligibility of the borrower under the normal home loan is only Rs 50 lakh and he won’t get a loan of Rs 56.55 lakh. By structuring the loan the way it has, SBI gets to collect interest longer than it actually would have.

What happens once the EMI kicks in after five years? The bank talks about moderated EMIs. It does not define what it means by it. Assuming that principal repayment starts after five years, the EMI will jump to around Rs 52,630.5. This means that the borrower will repay the home loan over the next 25 years, making the total tenure of the loan repayment 30 years. The scheme allows for repayment period of 25 to 30 years.

If the repayment is made over the next 20 years, meaning a tenure of 25 years, the EMI jumps to Rs 56,124. The EMI does not increase significantly in comparison to the earlier monthly payment. The reason for this lies in the fact that SBI has limited the loan eligibility under this scheme to just 20% more than the normal home loan scheme. Hence, to that extent SBI is not making a very risky loan, even though it is taking on some more risk than it currently is.

Also, it is important to understand here that once SBI launches a product, other banks and housing finance companies will have follow. If they stick to 1.2 times the normal loan amount, they will not be giving out very risky loans. If they get aggressive and up the ante, that will mean the lowering of home loan lending standards throughout the system. Hence, the RBI will have to keep a watch on this.

c) What can we learn from the American experience? Interest only home loans were a big reason behind the home loan bubble in the United States between 2000 and 2007. In the American context they were referred to as the option adjustable-rate mortgage (ARM). An option ARM was a 30-year home loan in which the borrower had the option of paying a lower EMI initially. One version of the product was called 5/1 interest-only option ARM.
In this, the interest rate was reset after the first five years and then every year after that. Also, for the first five years, the borrower needed to pay back only interest on the home loan. In the American case, the interest rate in case of an interest only home loan was significantly lower than the normal home loan.

Hence, this product allowed borrowers to buy homes which were significantly more expensive than they could afford. In the Indian case, the interest on the interest only home loan is the same as the normal home loan.

Also, in the United States, after a point there was a race among banks and financial institutions to give out these loans. As more such loans were given, home prices went up, leading to a huge real estate bubble.

Once the higher EMIs started kicking in, the borrowers started defaulting on their loans. This eventually led to the start of the financial crisis that the world is currently battling. Given this, the lessons from the American experience are very clear. Interest only home loans are pretty risky if the interest rate differential between a normal home loan and an interest only home loan is high. That is clearly not the case with the new SBI FlexiPay home loan and this brings us back to the original question.

d) Why is the SBI doing this? From what the RBI governor Raghuram Rajan has been saying, it doesn’t seem that this home loan scheme would have had a total buy-in from him. Given this, I think SBI may have been nudged to launch this scheme by the finance ministry, in order to get the real estate sector going in this country. Given that I have no evidence for this, to that extent this remains a conspiracy theory.

Nevertheless, if this scheme and other such schemes launched by other banks and housing finance companies gain some traction, they will prolong the real estate bubble in the country even more. Hence, instead of reviving real estate, it will make purchasing a home even more difficult. At the same time, I don’t think SBI is taking on an undue risk by launching this scheme. But it remains to be seen how other banks enter this space. If they lower lending standards by increasing the loan eligibility further, we may have a problem.

The column originally appeared on the Vivek Kaul Diary on February 2, 2016

22 January, 2016

Is Your Banker with You or with Corporates?

What is the purpose of a bank? Any bank?

It is to match lenders with borrowers.

It is to take the savings of people (i.e. deposits) by offering a certain rate of interest and then lend it out at a higher rate of interest, and in the process make a reasonable profit.

Is that all there is to it? No.

The bank also has to ensure that the deposits that it lends out are fully repaid. This means carrying out a proper “due diligence” of the borrower, before lending money.
It also means lending only to those people it expects will repay.

It also means not lending to people and companies who are already in trouble.

It ‘basically’ means not putting the depositor’s savings at risk.

These are the basic tenets of banking, which the Indian banks, in particular banks owned and run by the government, have broken over the past few years, and continue to do so.

Take the case of the 5/25 scheme which banks have been using in order to restructure loans which borrowers have had trouble repaying. What is the 5/25 scheme? There are many physical infrastructure projects which have long gestation periods of up to 25 years. The trouble is that companies which have borrowed money to build such projects need to repay the principal amount of the loan in a period of around five years.

And this creates a problem simply because in a short period of five years, physical infrastructure projects like roads do not start to throw up money which can be used to repay the loan that has been taken on.

In this scenario defaults start to happen even though the project continues to remain economically viable. It’s just that a period of five years is too short a time for the project to start throwing up money which the corporate can use to repay the loan that it has taken on. Having said that, such a loan could perhaps be easily repaid over a period of 25 years.

The Reserve Bank of India has allowed banks to restructure such loans by allowing corporates to delay making principal repayments of the loan. In some cases, interest repayments have also been delayed.

As Suresh Ganapathy and Sameer Bhise of Macquarie Research write in a recent research note titled Apocalypse Now: “RBI has allowed that going forward, banks can restructure loans such that they can finance the projects for 5 years and at the time of structuring the contract, stipulate an explicit condition that at the end of 5 years, loans will be rolled forward for the next 20 years and define milestone payments at the end of every subsequent 5-year period.”

A loan restructured under the 5/25 scheme is not treated as a bad loan. Further, only loans of Rs 500 crore or more can be restructured under this scheme.

All this sounds good on paper. The trouble is this rule is being used by banks to postpone the recognition of bad loans. Take the case of Essar Steel. As Ganapathy and Bhise write: “For example, in case of Essar Steel—an account that HDFC Bank already classifies as a non performing loan and on which the bank has already taken 40% provision—other banks have instead refinanced their loan. According to the terms agreed by the consortium of bankers led by State Bank of India, Essar Steel needs to pay just about 9% of the principal loan in the initial 7 years, and the remaining 91% will be due for refinancing at end-2022.”

What does this tell us? HDFC Bank probably the best managed bank in the country has classified Essar Steel as a bad loan. Other banks led by State Bank of India have refinanced the loan. Refinancing essentially means giving a new loan so that the older loan can be repaid, and a new loan can be started on better terms for the borrower.

The question is why are banks refinancing a loan to a company in the steel sector, which is currently in a mess and is unlikely to recover any time soon. The prospects of the sector remain largely subdued over the next five years.

Also, what explains HDFC Bank categorising the loan as a bad loan, and other banks giving Essar Steel a fresh loan? It is not surprising that HDFC Bank as on March 31, 2015, had a net non-performing assets ratio (one representation of bad loans) of 0.20% of its total advances. In case of State Bank of India the number had stood at 2.12%. This is a clear case of what the RBI governor Raghuram Rajan had called “extend and pretend” that all is well.

Now let’s take the case of Bhushan Steel. Loans of the company amounting to Rs 40,000 crore were restructured under the 5:25 scheme in February 2015. As Parag Jariwala and Vikesh Mehta of Religaire Institutional Research write in a research note titled SDR: A band-aid for a bullet wound: “Under 5:25, Bhushan Steel’s loan repayments have been postponed for the first four years and thereafter are to be made in a staggered manner in the next 21 years. Management stated that the company may face small repayments of Rs 500 crore per annum which in all probability will be funded by the current set of banks.”

Between 2015 and 2019, Bhushan Steel need not make principal repayments on the loans worth Rs 40,000 crore. Over and above this, it is not in a position to repay even the small repayments of around Rs 500 crore per year. The banks will give it new loans so that it can pay these dues. Jariwala and Mehta point out that the company can generate only up to Rs 200 crore of free cash flow during the course of this financial year. Hence, it is not in a position to repay Rs 500 crore. The company also has interest dues of close to Rs 4,000 crore during the course of this year.

The question is if a company is not in a position to repay Rs 500 crore currently, will it really get around to being able to repay Rs 40,000 crore over a period of time?

In fact, the loans given to many big business groups are being restructured under the 5:25 scheme. As Ganpathy and Bhise point out: “As the table below shows, several cases are now being considered for 5:25 refinancing, which also explains why some of these large groups are not currently classified as non-performing loans. Close to 1.7% of system loans are under consideration or already being implemented for 5:25 refinancing. Another issue is that banks may have lent fresh loans to these groups to cover interest payments on older loans.”

What does this mean? It means that the banks will be able to further delay recognising bad loans as bad loans for the next few years. As Zariwala and Mehta write: “Banks are likely to restructure such accounts through SDR/5:25, which would delay non-performing assets recognition as well as increase the likely losses due to additional funding.”
To conclude, it is safe to say that the banks are clearly with companies and not with depositors whose hard-earned money they have lent.

The column originally appeared on Vivek Kaul’s Diary on January 22, 2016

21 January, 2016

When It Comes to Bad Loans of Banks, Nothing is as It Seems

One of the issues that I have been regularly writing about is the bad state of banks in India. The tragedy is that their state continues to get worse as time progresses.

As on September 30, 2015, the bad loans of the banking system amounted to 5.1% of the total loans given by banks. The number was at 4.6% as on March 31, 2015. This is a huge jump of 50 basis points in a short period of just six months. One basis point is one hundredth of a percentage.

The trouble is that even the bad loans number of 5.1% of total loans, may not be the right number. This is primarily because over the years the Indian banks, in particular public sector banks, seem to have mastered the art of not recognising a bad loan as a bad loan. They have turned the practice of kicking the can down the road, to an art form.

Banks have used various methods to delay the recognition of bad loans and this has made balance sheets of banks more opaque. As Suresh Ganapathy and Sameer Bhise of Macquarie Research write in a recent research note titled Apocalypse Now: “The biggest problem that we now have with the Indian banking industry is that various regulatory forbearance techniques like restructuring (for under-construction infra and long term projects), 5:25 refinancing, SDR (strategic debt restructuring), NPL sales to ARCs (asset reconstruction companies) etc., are making the balance sheets of banks more opaque.”

Forbearance essentially means “holding back”. In the context of banking it means that the bank gives more time/better terms to the borrower to repay the loan, among other things. This could mean extending the term of the loan, lowering the interest or even postponing the repayment of the principal of the loan for a few years. Such loans are also referred to as restructured loans.

These options were supposed to be used sparingly. Nevertheless, banks in general and public sector banks in particular have massively abused these options over the years, in order to postpone the recognition of bad loans.

The bad loans of public sector banks stand at 6.2% of total loans, as on September 30, 2015. The restructured loans on the other hand stand at 7.9% of total loans. For the system as a whole, the number stands at 6%, which is higher than total bad loans, which stand at 5.1% of total loans.

The trouble is that many of the loans which were restructured in the years gone by have been defaulted on. As mentioned earlier one of the popular methods of restructuring a loan is to give the borrower a moratorium of few years on the repayment of the principal amount of the loan. The idea is that in that period the company will manage to set its business right and be in a position to start repaying the loan.

But that hasn’t happened. The restructured loans have been turning into bad loans. Ganpathy and Bhise of Macquarie Research estimate that the failure rate of restructured loans has jumped from 24% to 41%, over the last two years. “Many of these loans have come out of their principal moratorium and started defaulting,” the analysts point out.

What such a large default rate clearly tells us is that many of these loans should not have been restructured in the first place. As a November 2014 editorial in the Mint newspaper points out: “The decision to restructure a loan was supposed to be a technical one, taking into account the viability of the borrower. But in case of government banks, the decision to restructure has often been influenced by political considerations, and has depended on the clout of the concerned promoters.” The restructured loans now being defaulted on would have been restructured before the Narendra Modi government came to power in May 2014.

The situation is likely to get worse given that around half of the restructured loans were restructured over the last two years. Hence, companies have a moratorium on principal repayments for a period of two years. Once they start coming out of this moratorium, the loan defaults will go up.

Over and above this many companies continue to remain highly leveraged, that is they have significantly more debt on their books in comparison to their equity. In fact, as the Financial Stability Report released by the Reserve Bank of India(RBI) in December 2015 points out: “The proportion of companies among the leveraged companies with debt equity ratio of >=3 (termed as ‘highly leveraged’ companies) increased from 13.6 per cent in September 2014 to 15.3 per cent in September 2015, while the share of debt of these companies in the total debt increased from 22.9 to 24.9 per cent.”

This has happened because banks have lent more money to companies which are already in trouble and not in a position to repay their loans. As Parag Jariwala and Vikesh Mehta of Religaire Institutional Research write in a research note titled SDR: A band-aid for a bullet wound: “Bank funding to stressed corporates has gone up in the last 2-3 years and most of it is towards funding additional working capital requirement, loss funding and interest accruals (not paid). This will translate into large and bulky credit cost for banks if these accounts slip into non-performing assets [bad loans].”

Also, there is the problem of large borrowers. As Jariwala and Mehta point out: “The RBI’s analysis shows that stressed assets [bad loans + restructured assets] as a proportion of total loans to large corporates have gone up from 13.8% in Mar’15 to 15.5% in Sep’15.”

Further, what is worrying is that banks are still to recognise many of these loans as bad loans. As Ganpathy and Bhise point out: “The issue is that some of these large corporate groups have already been downgraded to default by rating agencies. Since banks have a 90-day window to classify as non-performing loans plus have other regulatory forbearance techniques like restructuring (still can be done for underconstruction projects) and 5:25 refinancing, these assets are not being shown as non-performing loans on the books.”

The analysts estimate that large borrowers form around 11-12% of total bank loans and roughly 15% of these loans are likely to turn into bad loans over the years.

Once these factors are taken into account, Ganpathy and Bhise feel that “potentially 16-18% of the loans will attract higher provisions and/or see write-offs over the next 3-4 years.” This means nearly one-sixth of bank loans can still go bad. And that is a huge number.

Hence, when it comes to bank loans, nothing is as it seems.

Stay tuned!

The column originally appeared in the Vivek Kaul Diary on January 21, 2016

6 January, 2016

Why banks love lending to you and me, but hate lending to corporates

RBI-Logo_8
Regular readers of this column would know that I regularly refer to the sectoral deployment of credit data usually released by the Reserve Bank of India(RBI) at the end of every month. This data throws up interesting points which helps in looking beyond the obvious.
On December 31, 2015, the RBI released the latest set of sectoral deployment of credit data. And as usual the data throws up some interesting points.

What the banks refer to as retail lending, the RBI calls personal loans. This categorisation includes loans for buying consumer durables, home loans, loans against fixed deposits, shares, bonds, etc., education loans, vehicle loans, credit card outstanding and what everyone else other than RBI refer to as personal loans.

Banks have been extremely gung ho in giving out retail loans over the last one year. Between November 2014 and November 2015, scheduled commercial banks lent a total of Rs 5,04,213 crore (non-food credit). Of this amount the banks lent, 39.4% or Rs 1,98,727 crore were retail loans. Hence, retail loans formed closed to two-fifths of the total amount of lending carried out by banks in the last one year.

How was the scene between November 2013 and November 2014? Of the total lending of Rs 5,45,280 crore carried out by banks, around 27.7% or Rs 1,50,843 crore was retail lending. Hence, there has been a clear jump in retail lending as a proportion of total lending over the last one year.

In fact, if we look at the breakdown of retail lending (or what RBI refers to as personal loans) more interesting points come out.

Outstanding as on: (In Rs crore)	Nov.28, 2014	Nov.27, 2015	Increase(in Rs crore)	Increase in %
Personal Loans	1105910	1304637	198727	17.97%
Consumer Durables	14660	16545	1885	12.86%
Housing (Including Priority Sector Housing)	594603	705235	110632	18.61%
Advances against Fixed Deposits	55339	60458	5119	9.25%
Advances to Individuals against share, bonds, etc.	3861	6886	3025	78.35%
Credit Card Outstanding	29486	37646	8160	27.67%
Education	62721	67682	4961	7.91%
Vehicle Loans	119410	137887	18477	15.47%
Other Personal Loans	225830	272297	46467	20.58%

The overall increase in retail loans has been around 18% over the last one year. This is significantly better than 8.8% increase in overall lending by banks (non-food credit i.e.). Within retail loans, vehicle loans and consumer durables have grown slower than the overall growth in retail loans. How did things stand between November 2013 and November 2014?

Outstanding as on (in Rs crore)	November 29, 2013	November 28,2014	Increase in Rs crore	Increase in %
Personal Loans	955067	1105910	150843	15.79%
Consumer Durables	9987	14660	4673	46.79%
Housing (Including Priority Sector Housing)	510171	594603	84432	16.55%
Advances against Fixed Deposits	56032	55339	-693	-1.24%
Advances to Individuals against share, bonds, etc.	2832	3861	1029	36.33%
Credit Card Outstanding	24147	29486	5339	22.11%
Education	58953	62721	3768	6.39%
Vehicle Loans	97914	119410	21496	21.95%
Other Personal Loans	195028	225830	30802	15.79%

The retail loans between November 2013 and November 2014 had grown by 15.8%. In comparison, the growth between November 2014 and November 2015 was at 18%. This increase can be attributed to the 125 basis points repo rate cut carried out by the Reserve Bank of India during the course of this year. One basis point is one hundredth of a percentage. Repo rate is the rate at which RBI lends to banks and acts as a sort of a benchmark to the interest rates that banks pay for their deposits and in turn charge on their loans.

But despite a rapid and massive cut in the repo rate, the jump in retail loan growth hasn’t been dramatic. In fact, loans for the purchase of consumer durables grew by 12.9% between November 2014 and November 2015. They had grown by 46.8% between November 2013 and November 2014, when interest rates were higher. Vehicle loans grew by 15.5% in the last one year. They had grown by 22% between November 2013 and November 2014. This despite a fall in interest rates. Home loans had grown by 16.6% between November 2013 and November 2014. They grew by 18.6% between November 2014 and November 2015. There has been some improvement on this front. Hence, lower interest rates have had some impact on retail borrowing, but not as much as the experts and economists who appear on television and write in the media, make it out to be.

What does this tell us? As L Randall Wray writes in Why Minsky Matters: An Introduction to the Work of a Maverick Economist, quoting economist Hyman Minsky: “According to Minsky, bank lending would…be determined….by the willingness of banks to lend, and of their customers to borrow.”

So why are banks more than happy to lend to give out retail loans? As I had pointed out in yesterday’s column, lending to the retail sector continues to be the best form of lending for banks. The stressed loans ratio (i.e. bad loans plus restructured loans) in this case is only 2%. This means that for every Rs 100 lent by banks to the retail sector only Rs 2 worth of loans is stressed.

The same cannot be said about the loans that banks have been giving to corporates. The lending carried out by banks to industry as well as services in the last one year formed around 43.4% of the overall lending carried out by banks. Between November 2013 and November 2014, the lending carried out by banks to industry as well as services had stood at 50% of overall lending.

What explains this? Lending to large corporates has led to 21% stressed loans. The same is true for medium corporates where stressed loans form 21% of overall loans. And this best explains why banks have been happy to lend to you and me, but not to corporates.

The column originally appeared on Vivek Kaul’s Diary on January 6, 2016