One of the data points that analysts like to refer to while talking about slow economic growth, is the slow growth in loans given out by banks. If we consider the one year period between July 25, 2014 and July 24, 2015, the overall lending by banks grew by 9.4%. In the period of one year between July 26, 2013 and July 25, 2014, the loan growth was much stronger at 12.8%.
In absolute terms, in the last one year, the banks gave out Rs 5,71,820 crore of loans. This is lower than the total amount of Rs 6,88,640 crore, that banks gave out between July 2013 and July 2014.
So banks are not lending as much as they were in the past. And that clearly is a problem. But this does not apply to the money that banks have lent to the government.
Between July 2014 and July 2015, the banks invested Rs 3,40,750 crore in government securities. The government issues financial securities to finance its fiscal deficit or the difference between what it earns and what it spends. Banks buy these financial securities and thus lend to the government.
Interestingly, the investment by banks in government securities during the period July 2013 and July 2014 had stood at Rs 1,298,50 crore. Hence, between July 2014 and July 2015, the investment by banks in government securities has jumped a whopping 162.4%.
In fact, the comparison gets even more interesting when we get deposits raised by banks between July 2014 and July 2015 into the picture. In the last one year banks raised Rs 9,34,090 crore as deposits. Of this 36.6% (or Rs 3,40,750 crore) found its way into government securities. Between July 2013 and July 2014, only 14.7% of deposits raised had been invested in government securities.
What do all these numbers tell us? They tell us loud and clear that the Indian banking system currently wants to play it safe. In other words this is “lazy” banking. Lending to the government is deemed to be the safest form of lending. This is primarily because government can borrow more money to repay the past borrowers. It can also print money and repay its loans. Private borrowers cannot do that.
What is also interesting is that banks are also giving out more home loans than they were in the past. Between July 2014 and July 2015, home loans formed around 17.6% of the total lending. This number between July 2013 and July 2014 had stood at 12.2%. This is primarily because a house is a very good collateral. Also, the rate of default on home loans is very low. In case of HDFC (which is not a bank but a housing finance company) the default rate is at 0.54%, which means that almost no one defaults on a home loan.
In case of State Bank of India, for retail loans, the default rate stands at 1.17%. The bank does not give out a separate default number for home loans. Auto loans, education loans and personal loans, are the other forms of retail loans. The default rates in case of these loans is likely to be higher. Hence, the default rate, in case of home loans given out by the State Bank of India, should be lower than 1.17%.
Compare this to what happens when the State Bank of India lends to mid-level corporates. The default rate is at a very high 10.3%. Hence, for every Rs 100 that India’s largest bank gives out as a loan to a mid-level corporate, more than Rs 10 goes bad.
If one factors all this into account it is not surprising that banks are comfortable lending only to the government and giving out home loans. In fact, over the last one year, banks have lent 47.3% of the total deposits they have raised during the period either to the government or as home loans. The number during the period July 2013 and July 2014 had stood at 24.3%.
Hence, banks are clearly trying to play it safe. This is lazy banking at its best.
Prime Minister Narendra Modi in his meeting with businessmen on September 8, 2015, asked them to increase their risk appetite and increase their investments. This is clearly not going to happen without banks being ready to lend to corporates.
The problem is that the last time banks went on an overdrive while lending to corporates they burnt their fingers badly, with corporates defaulting big time on their loans. And there is no easy way to solve this problem.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)
The column originally appeared on Firstpost on Sep 11, 2015