Raghuram Rajan

Bhaktonomics 101: All You Wanted to Know but Were Afraid to Ask

ARTS RAJAN

There is economics and then there is Bhaktonomics–or so called economics which is used regularly these days, to justify the actions of the Narendra Modi government.

This new faction of economics has never been explored before—at least not until today. In this column I will look at Bhaktonomics that is being used to justify why Raghuram Rajan should not have been offered a second term, as the governor of the Reserve Bank of India.

Here are a few arguments being made:

a) Rajan wasn’t cutting interest rates fast enough: This is an old argument that keeps getting made whenever a central bank does not cut interest rates as the government of the day would like it to. So the followers of Bhaktonomics say that Rajan should not have got a second term because he was not cutting interest rates fast enough.

The irony is that Rajan did cut the repo rate. The repo rate has been cut by 150 basis points since January 2015. 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 let’s leave that aside for a moment. Hence, the argument is Rajan wasn’t cutting interest rates fast enough. And because he wasn’t cutting interest rates fast enough, the bank lending had been growing at a slow rate. Since bank lending has been growing at a slow rate, individuals haven’t been borrowing to spend and companies to expand. Hence, economic growth hasn’t been robust enough. Given this, Rajan had to go.

But didn’t India grow at 7.6% in 2015-2016? Isn’t India the fastest growing major economy in the world? I personally don’t believe that India is growing at 7.6%. There are many other sceptics as well. But try telling that to the practitioners of Bhaktonomics and see how they react.

So, if India is indeed growing at 7.6%, and is the fastest growing major economy in the world, then Rajan has cut interest rates fast enough. And if he has cut interest rates fast enough, why is he being fired? Okay, okay. He has not been fired. He has chosen to go on his own.

If India is growing at 7.6%, then Rajan has cut interest rates fast enough. Or to put it as the conventional economists do, he hasn’t been behind the curve. On the flip side, if he hasn’t cut interest rates fast enough, then India isn’t growing at 7.6%. The broader point being that you can’t have it both ways like the Bhaktonomists are currently.

There are other points on the interest rate front that need to be made here. Rajan ensured that the real rate of interest on deposits was in positive territory, after a long time. This basically means that the difference between the nominal rate of interest on deposits minus the prevailing rate of inflation, is in positive territory.

This worked well for savers who had seen inflation eat away their hard earning during the Manmohan Singh years. It has also helped household financial savings grow, as less money went into gold and real estate, in comparison to the past. It is ultimately these financial savings which will finance the Make in India programme. So Rajan essentially was batting for the government and not against it, as Bhaktonomists have been pointing out.

But a real rate of interest for depositors means that the government had to bear a high rate of interest on its borrowings, something it is clearly not comfortable doing. This is after many years of paying a lower rate of interest on its borrowings than the prevailing rate of inflation.

Take a look at the following chart:

 

The green line is the rate of inflation. And the red line is the interest that the government pays on what it borrows. Between 2007 and 20013, the government paid a lower rate of interest than the prevailing rate of inflation.

The real rate of interest available to the depositors these days, does not allow the government to do that. Hence, as the biggest borrower going around, it wants lower interest rates. QED.

The saver be dammed. Bhaktonomics has no place for the savers. They are only bothered about the borrowers, which includes the government and the crony capitalists.

b) Individuals are not important/Nobody is indispensable: This is another point that is being vociferously made to justify the exit of Rajan. This is absolute rubbish. If that was the case then Manmohan Singh, would have still been prime minister.

Individuals make institutions and governments. They make institutions and they destroy them as well. Hence, individuals are important. What India lacks are institutions. One man cannot take this country out of the rut that it is in. Good institutions can. And institutions are ultimately built as well as nurtured by individuals. So saying that individuals are not important is not even an argument.

Also, India’s government these days gets as much attention as it does, globally, primarily because Narendra Modi heads it. Modi is an individual. His being the head of the Indian government gives it more credibility than the last one and given that he matters. And like he matters, so does Rajan, when it comes to the RBI.

Further, you don’t hound out an employee who is doing well, especially when you have a serious talent crunch anyway, when the best brains do not want to work for the government (and I mean any Indian government here not just this government) and stay far away from it. If something is working why try and destroy, in order to fix it again? Beats me. Perhaps, Bhaktonomics has an explanation for this as well.

Also, the next RBI governor, whoever he or she is, will take time to settle into the job. And precious time will be lost. This is when inflation has started to go up again. So have oil prices. The cleaning up of bad loans of banks has reached a very important stage. Continuity would have been good here.

In fact, The Indian Express reports that earlier this year the government scrapped the search for a new chief of the Securities and Exchange Board of India(Sebi) and extended the term of UK Sinha on the pretext that ““continuity may be desirable” at times of “excessive volatility — mainly due to external factors””.

If this was true for Sebi earlier this year, it is more than true for the RBI at this point of time. So, why the double standards? Also, UK Sinha, the Sebi chief, like Rajan, is a UPA appointee.

c) It’s the government’s prerogative to decide who works for it: This is the third argument being made justifying Rajan’s exit and is by far the most sensible of the lot. Also, it is better than saying nobody is indispensable.

But is this the way you hound out an RBI governor, when RBI remains one of the few government institutions which hasn’t degraded over the years? You don’t let an unelected member of Parliament run a malicious campaign against the RBI governor and then come out and say this is not the party’s stated position on the issue.

If you didn’t want him, the same could have been communicated to him, in a good way. Tata, bye bye.

The way Rajan’s exit has been handled, it is clear that the message that the government wants to send out is, that if you want to work for us, then you need to be a cheerleader (or  team player as the euphemism goes), and if you have an opinion your own, then it’s better to keep your mouth shut.

As Chandan Mitra of the BJP put it in a column on NDTV.com: “He also demonstrated a less-than-patriotic enthusiasm to play cheerleader, expected to tom-tom his government’s achievements.”

The column originally appeared in Vivek Kaul’s Diary on June 21, 2016

एक थे रघुराम राजन (Once There Was Raghuram Rajan)

ARTS RAJAN

If you want to survive in a bureaucracy, any bureaucracy, it is important that you market your bosses well.

It is important that you say things that your bosses like.

It is important that you repeat things that your bosses have been saying and like to believe in.

It is important that you laugh at the jokes that your bosses crack—even the ones you do not understand.

It is important that you do not have an opinion of your own. And if you do, it is better if you keep your mouth shut.

Because if you don’t, chances are that you might be asked to leave very soon.

That is one of the unwritten rules of India’s democracy.

The Congress excelled at it for close to the six decades that it governed the country. And the Bhartiya Janata Party has just continued where the Congress left.

Raghuram Rajan, the twenty-third governor of the Reserve Bank of India(RBI), probably did not understand this.

As a consequence, he won’t be getting a second term. This will be the shortest term any RBI governor has got since 1992.

The loss, of course, is ours.

When Rajan took over as RBI governor in September 2013, he brought a sense of balance to the Indian economy, which was all over the place.

The rupee was crashing against the dollar.

The inflation was in double digits.

And people had just started to realise that public sector banks were sitting on a pile of bad loans.

India wanted to be China. But it was looking more and more like Brazil.

As Ruchir Sharma writes in his new book Rise and Fall of Nations—The Rules of Change in the Post Crisis World: “Though India was hoping to be the next China, its government was building another Brazil, a low-growth, high-inflation economy. Between 2009 and 2013 India’s key economic numbers flipped for the worse: GDP growth fell by nearly half, to 5 percent, and inflation doubled to 10 percent.”

Strong inflationary expectations had set in. As Indian workers started to believe that prices will continue to rise at a fast rate, they demanded higher wages. As Sharma writes: “This is a particularly dangerous cycle. Once the spiral begins, it is likely to spin for a few years before the central bank can contain it…Rajan…immediately made clear he understood that fighting inflation was the bank’s top priority. And then in 2014, [India] got a new prime minister who, despite the populist pressure for the central bank to cut interest rates, seemed to back Rajan’s plan to move cautiously with an eye to anchoring inflationary expectations.”

This, along with a huge fall in oil prices, helped control inflation. In fact, Rajan has been severely criticised for keeping interest rates too high in order to bring down inflation. But the fact of the matter is, that after a very long time, depositors are actually getting a real rate of interest on their deposits. This basically means that the difference between the nominal rate of interest on deposits minus the prevailing rate of inflation, is in positive territory.

As Rajan told NDTV in a recent interview: “When inflation was 9% they [i.e. depositors] were getting 9%. This meant earning nothing in real terms and losing everything in inflation…Today they are getting 7% on their deposits and inflation is 5.5%. They are earning 1.5%. It is a real difference.”

This was a real achievement and people are being encouraged to save. In fact, if real interest rates on deposits continue to be the order of the day, then this will help build India’s household financial savings, which have fallen majorly in the last few years.

Between 2005-2006 and 2007-2008, the average rate of household financial savings stood at 11.6% of the GDP. In 2009-2010, it rose to 12% of GDP. By 2011-2012, it had fallen to 7% of the GDP. The household financial savings in 2014-2015, stood at 7.5% of GDP. The 2015-2016 figure should be better than 7.5%.

Household financial savings is essentially a term used to refer to the money invested by individuals in fixed deposits, small savings schemes of India Post, mutual funds, shares, insurance, provident and pension funds, etc. A major part of household financial savings in India is held in the form of bank fixed deposits and post office small savings schemes.

In fact, because of high inflation, a lot of money went into gold between 2008 and 2013, as people looked at hedging against inflation. With real interest rates in positive territory this has changed. Further, it needs to be said here that if Narendra Modi’s flagship programme Make in India, needs to take off, then India’s household financial savings need to go up as well. It is these savings that will finance the projects under the programme.

For this to happen, real interest rates are important. As Rakesh Mohan and Munish Kapoor of the International Monetary Fund write in a research paper titled Pressing the Indian Growth Accelerator: Policy Imperatives: “In the near future, we expect financial savings to be restored to the earlier 10 per cent level, as inflation subsides, monetary conditions stabilize and households begin to obtain positive real interest rates on their deposits and other financial savings. Financial savings are then projected to increase gradually to around 13 per cent by 2027-32.”

And how is this going to happen? As Mohan and Kapoor point out: “A sustained reduction in inflation that leads to the maintenance of low nominal interest rates, but positive real interest rates, will help in restoring corporate profitability, while encouraging household savings towards financial instruments.”

This clearly tells us that Rajan was clearly on the right path and it would have been terrific Modi had offered him a second term.

On the flip side, the critics of Rajan keep saying that bank lending is growing at a very slow pace because of high interest rates. Between April 2015 and April 2016 (actually it’ a little more than a year between April 17, 2015 and April 29, 2016), bank lending(non-food) has just grown at by 8.4%. Indeed, this is slow and not as fast as it was in the past. But that is only if we look at the overall bank lending.

In the last one year, the retail loans of banks have grown by 19.7%. Between April 2014 and April 2015(between April 18, 2014 and April 17, 2015), these loans had grown by 15.7%. In fact, the growth in the lending of non-priority home loans in the last one year had stood at 28.6%.

Hence, the retail loan growth has clearly picked up over the last one year, after Rajan cut the repo rate by 150 basis points, starting in January 2015. What is interesting is that in the last one-year retail loans have formed around 45.6% of the total loans given by banks (i.e. non-food credit).

Interestingly, between April 2014 and April 2015, retail loans had formed 32.4% of the total lending. Taking these points into account along with the fact that lending to industry grew by 0.4%, it is safe to conclude that banks are not in a mood to lend to industry. This is primarily because of the huge amount of bad loans that public sector banks are carrying on the loans previously made to industry.

This slow growth has pulled the overall growth number down. Rajan has encouraged banks to clean up their books and at the same time, go after the assets of crony capitalists who have defaulted on their loans. This is likely to yield results in the days to come, assuming that the next RBI governor and the government continue on this path. Of course, in the short run, it has upset the calculations of many a crony capitalist, who would now be feeling relieved with Rajan’s exit in September. But what is good for the crony capitalist cannot be good for the country. Hence, Rajan’s going is not good for the country.

Further, it is worth pointing out here that the appointment of the next RBI governor is of immense importance. A country is not built by a single individual, but it is built by the institutions that he or she nurtures.

In India, precisely the opposite things have happened. Our politicians, starting with Indira Gandhi, have used the bureaucracy and the institutions to create jobs for their supporters and not to support the country.

As  Gurcharan Das writes in India Grows At Night: “No one anticipated that politicians in India’s democracy might gradually ‘capture’ the bureaucracy and use the system to create jobs and rents for their friends and supporters.” The previous Congress led governments excelled at this.

Narendra Modi has shown a similar tendency. The latest such appointment is that of ex-cricketer Chetan Chauhan as the Chairman of National Institute of Fashion Technology (NIFT is not just about fashion design, if that is what you think). I sincerely hope that Modi does not make the same mistake while appointing the next RBI governor.

If he does appoint one of his friends or supporters as the next governor of RBI, it will not send a good signal, either nationally or internationally. If Modi doesn’t appoint a proper professional to the RBI, it will tell us that even though Congress Mukht Bharat might be possible politically, institutionally that day is never going to come.

Loyalty to the King, will remain the only way of surviving in the Indian bureaucracy. And that can’t be a good signal in any way, especially for a leader who had briefly offered us hope of being different. But by failing to give Rajan a second term he has shown that institutionally India has just one model of governance and that is the Congress model, where blind loyalty to the leader is most important.

Postscript: One argument that is being made is that India has many good economists to replace Rajan. We sure do.

But none of them has the same international stature as Rajan. Not Arvind Panagariya. Not Arvind Srinivasan. Not Rakesh Mohan. Not Urjit Patel. Not Bibek Debroy and all the other names who are supposedly in the race.

And honestly, who fires an employee who is doing well? Only, an insecure boss.

The column originally appeared on the Vivek Kaul Diary on June 20, 2016

 

Why Raghuram Rajan had to go

ARTS RAJAN

Raghuram Rajan, the governor of the Reserve Bank of India(RBI), announced on Saturday evening (June 18, 2016) that he won’t be taking a second term, and would return to his teaching job at the University of Chicago.

In a letter to the RBI employees, which was released to the press, Rajan said: “I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.”

Since the letter has been released a small industry has cropped up, trying to figure out, why has this happened. Other than being the RBI governor, Rajan is also a public intellectual in his own right. Given this, he had things to say on a wide variety of issues and from the looks of it, some of these things haven’t gone down well with the government of the day.

More than one minister has publicly criticised Rajan for having an opinion on a wide range of issues. Take the case of a comment he made in April
this year. “I think we have still to get to a place where we feel satisfied. We have this saying — ‘In the land of the blind, the one-eyed man is king.’ We are a little bit that way,” Rajan told Marketwatch.com. Rajan was referring to India’s fast economic growth, in a slow growing world.

This did not go down well with the government and Nirmala Sitharaman, the commerce minister, told the press: “I may not be happy with his choice of words. I think whatever action is being taken by this government is showing results.”

Rajan perhaps forgot that he was working with a government which is extremely sensitive to criticism. He later clarified what he really meant in another speech, where he said: “My intent was to signal that our outperformance was accentuated because world growth was weak, but we in India were still hungry for more growth. I then explained that we were not yet at our potential, though we were at a cusp of a substantial pick-up in growth given all the reforms that were underway.” But by then the damage had already been done.

There were other similar occasions where his comments did not go down well with the government of the day, and that seems like the major reason for his early exit. It needs to be pointed out here that no RBI Governor since 1992 has had just a three-year term. C Rangarajan at four years and 334 days, has had the shortest term after Rajan. Bimal Jalan, YV Reddy and D Subbarao all got terms close to five years. In fact, Jalan’s term was close to six years.

So letting the RBI governor go in a period of three years, is clearly unprecedented. Something of this sort has not happened in close to 25 years. In the recent past, the maverick Member of Parliament, Subramanian Swamy, has run a rather slanderous campaign for his removal. That seems to have had its impact as well. Further, a section of the government has never liked Rajan, given that he was appointed by the previous Congress led United Progressive Alliance government.

Rajan’s tenure had many good things about it. First and foremost, as soon as taking over, he handled the rupee crisis very well. Inflation has been brought under control from the earlier double digit levels, though that was not only because of the RBI. The bad loans mess in the public sector banks has been brought into the open. And for the first time in India’s history, banks have gone aggressively after crony capitalists, who defaulted and are still defaulting on bank loans.

This is unprecedented. In the past, the show would have just gone on. Crony capitalists would have defaulted only to borrow again a few years later, and the taxpayers would have taken on the tab. This remains Rajan’s biggest achievement. It will be interesting to see if the next RBI Governor continues to be aggressive on this front. For now, India’s crony capitalists will be breathing a sigh of relief and opening champagne bottles for sure.

Over and above this, Rajan has an international stature. He is the only central banker who has openly spoken out against the massive amount of money printing that has been carried out by the Western central banks and the ill effects of the same.

Rajan’s outspokenness on issues, as many in India feel, is not a recent phenomenon. In August 2005, at a Federal Reserve of Kansas’s annual symposium at Jackson Hole, Wyoming, in the United States, Rajan had criticised the policies of Alan Greenspan, the then Chairman of the Federal Reserve of United States.

Greenspan was considered as god in banking circles at that point of time and the Jackson Hole symposium was supposed to be a sort of a send-off for him, before he retired in 2006. Rajan spoilt Greenspan’s party by saying: ““The bottom line is that banks are certainly not any less risky than the past despite their better capitalization, and may well be riskier. Moreover, banks now bear only the tip of the iceberg of financial sector risks…the interbank market could freeze up, and one could well have a full-blown financial crisis.”

Three years later, the financial crisis which the world is currently dealing with, started with Lehman Brothers, the fourth largest investment bank on Wall Street, going bust. The US government had to then come to the rescue of the American financial system. Rajan’s warning came to be true.

Of course, when Rajan spoke out against Greenspan, he was severely criticised by other economists attending the symposium. As he would later admit in his bestselling and brilliant book Fault Lines: “I exaggerate only a bit when I say I felt like an early Christian who had wandered into a convention of half-starved lions. As I walked away from the podium after being roundly criticized by a number of luminaries (with a few notable exceptions), I felt some unease. It was not caused by the criticism itself…Rather it was because the critics seemed to be ignoring what’s going on before their eyes.”

Something similar seems to have been happening in India as well, where the critics of Rajan seemed to have closed their eyes to the issues that the country is currently facing and want to hear good things about the Indian economy all the time.

There justification for Rajan’s removal is that India has enough good economists to fill his shoes. Of course, it does. But there is no one who has the same respect as Rajan has globally.

Further, is that really the point? When was the last time a board fired a well-performing CEO, because he did not agree with their views all the time?

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared on BBC on June 20, 2016

Here’s Why the Biggest Crib of Real Estate Companies is a Big Lie

India-Real-Estate-Market

Earlier this month, Raghuram Rajan, the governor of the Reserve Bank of India(RBI) presented the second monetary policy statement for 2016-2017. Rajan decided to keep the repo rate at 6.5%.  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.

The real estate lobby Confederation of Real Estate Developers’ Associations of India (CREDAI) wasn’t happy with this. As C Shekar Reddy, ex-president and national executive member of CREDAI told The New Indian Express: “Banks are charging 9.50 pc or more interest on home loans. People will be motivated to buy homes if the loan interest rates are lowered. All our representations to banks to cut the interests rates to give a fillip to the struggling housing sector have gone in vain. Whenever we approached the banks earlier, they said they would think of reducing interest rates if RBI did so with its policy rates.”

Similar statements were made by other CREDAI officials as well. As Geetambar Anand, the president of CREDAI told the Press Trust of India: “It was on expected lines. Now, banks should be advised to reduce interest on home loans by another 50 basis points.” One basis point is one hundredth of a percentage.

The basic point being made is that the RBI has kept the repo rate too high. As the repo rate is high, the interest rate charged by banks on home loans are high. As interest on home loans is high, people are not buying homes. As people are not buying homes, real estate companies are suffering. Or as SARE Homes MD Vineet Relia told PTI: “Since demand in real estate and allied industries remains sluggish, a rate cut could have improved liquidity and created renewed interest in property purchase.”

While all this sounds quite logical, it isn’t correct. Every month, the Reserve Bank of India releases the sectoral deployment of credit data. This data essentially gives out the total amount of lending carried out by banks to different sectors. And this includes home loans given out for the purchase of homes.

In the last one year (actually it’s a period slightly greater than a year, between April 17, 2015 and April 29, 2016), the overall lending of banks (i.e. non-food credit) has grown by just 8.4%. As I explained in yesterday’s column, this has happened primarily because banks have more or less stopped making fresh loans to industry.

Nevertheless, the retail loans of banks have grown at a very good pace, over the last one year. The retail loans include home loans, vehicle loans, education loans, credit card outstanding, loans against fixed deposits, loans against shares/bonds, and personal loans.

The overall growth of retail loans in the last one year stood at 19.7%. This had stood at 15.7% between April 2014 and April 2015. The home loans given out by banks have also seen a fairly robust growth. Home loans grew by 18.1% to Rs 7,58,203 crore, over the last one year. They had grown by 17.1% between April 2014 and April 2015.

Things become a little more interesting if we look at this data in a little more detail. The RBI gives also gives data on priority sector home loans. As per the Master Circular issued by the RBI in July 2014, priority sector home loans are essentially loans to individuals up to Rs 25 lakh in metropolitan centres with population above ten lakh and Rs 15 lakh in other centres.

The home loans given under the priority sector lending that banks need to carry out, grew by 7.6%, over the last one year. They had grown by 4.4% between April 2014 and April 2015.

As far as the non-priority sector home loans (home loans greater than Rs 25 lakh in centres with a population of above 10 lakh and greater than Rs 15 lakh in other centres), are concerned, they grew by a whopping 28.6%, in the last one year. The loans had grown by 33% between April 2014 and April 2015.

What does this tell us? The priority sector home loans are not growing because there are very few real estate markets in the country which banks service, where homes of up to Rs 15 lakh or Rs 25 lakh are available. The growth in priority sector home loan lending has been even slower than the overall bank lending growth.

In fact, in April 2014, priority sector home loans, made up for 56% of total home loans. By April 2015, this was down to 50%. And in April 2016, this stood at 45%. This is definitive evidence of the high real estate prices that continue to prevail in this country, despite what real estate builders keep telling us.

As far as non-priority sector home loans are concerned, they have grown by close to 29% over the last one year, after growing by 33% between April 2014 and April 2015. And that is a pretty good rate of growth, when overall lending growth is 8.4%, and retail lending growth is 19.7%. So what are the builders really complaining about?

I think what seems to be happening is that the home buyers are no longer buying under-construction homes. I have no way of verifying this through data. But that is what the data along with the builders cribbing all the time about the RBI, seems to suggest.

Over the last few years, many builders haven’t delivered homes on time. This has led to a situation where many individuals have had to pay the pre EMI along with the rent as well. Some people I know are even paying their EMIs along with their rents. (I don’t know how EMIs have started without possession of the home being taken).

Some builders have disappeared as well, after taking money from home buyers. Hence, homebuyers are staying away from under-construction property is what my analysis seems to suggest. It seems the buyers are now buying completed homes, which is where the home loans taken are basically going. This can mean that investors who had bought homes in the past are now selling out. It could also mean that builders who had completed inventory are selling it now.

This has hit the entire business model of the real estate developers, who raise money from prospective buyers, when they start building, without putting much of their own capital at risk. But then, for this, they have no one but themselves to blame.

The column originally appeared in the Vivek Kaul Diary on June 16, 2016

Rajan’s Not Responsible for Slow Growth in Bank Lending

ARTS RAJAN

It is fashionable to criticise the Reserve Bank of India(RBI) governor Raghuram Rajan these days.

It is fashionable to say that the economy is not doing well, because Rajan hasn’t cut interest rates.

And because Rajan hasn’t interest rates, bank lending isn’t growing.

And because bank lending isn’t growing, the Indian economy is stuck in a quagmire. But didn’t the economy grow at 7.6% in 2015-2016? So how is the economy stuck in a quagmire?

The problem with such analysis is that while it makes for great copy, it is extremely simplistic. Let me tackle all the points being made by the Rajan baiters, one by one.

The lending by banks (i.e. non-food credit) has grown by 8.4% between April 2015 and April 2016. Indeed, this is slow and not as fast as it was in the past. But that is only if we look at the overall bank lending.

If we look at the bank lending numbers in a little more detail, the situation is nowhere as bad as it is being made out to be. Let’s first look at what RBI calls personal loans (i.e. home loans, vehicle loans, education loans, credit card outstanding, loans against fixed deposits, loans against shares/bonds, and what the general people call personal loans). In normal nomenclature such loans are referred to as retail loans and that is what we will call them as well.

In the last one year (actually it’s not exactly one year, but a little more than one year between April 17, 2015 and April 29, 2016) the retail loans of banks have grown by 19.7%. Between April 2014 and April 2015(between April 18, 2014 and April 17, 2015), these loans had grown by 15.7%. Hence, the retail loan growth has clearly picked up over the last one year. What is interesting is that in the last one-year retail loans have formed around 45.6% of the total loans given by banks (i.e. non-food credit).

Interestingly, between April 2014 and April 2015, retail loans had formed 32.4% of the total lending. What does this mean? It means banks are now giving out more and more retail loans.

Why is that the case? The answer is very straightforward. The banks are not in the mood to increase their lending to industry. Lending to industry has grown by just 0.1% in the last one year, against the 5.9% between April 2014 and April 2015.

In fact, lending to medium level industry has fallen by 14% and that to small and micro industries has fallen by 6.7%. Only lending to large industry has grown by 2.2%. This lending had grown by 2.7%, 10% and 5.4%, respectively, between April 2014 and April 2015.

This is primarily because banks are sitting on a huge amount of bad loans on money that they have lent to industry. Let’s take the case of the State Bank of India, the largest public sector bank in the country, as well as the largest bank. Take a look at the following table.

This table shows us very clearly that for the State Bank of India, lending to the retail segment (or what RBI classifies as personal loans) is by far the best form of lending. The gross non-performing ratio (or the bad loans ratio) for 2015-2016 was at 0.75% of the total loans given to the retail sector. This came down from 0.93% in 2014-2015.

Take a look at what has happened to lending to industry. The bad loans ratio of large corporates has jumped from 0.54% to 6.27%. The bad loans ratio of mid-level corporates has jumped from 9.76% to 17.12%. And the bad loan ratio of small and medium enterprises has remained more or less stable and increased marginally from 7.78% to 7.82%.

The State Bank of India is a very good representation of the public sector banks. In this scenario it is not surprising that banks are not in the mood to lend to corporates. Further, many corporates are also over-leveraged and are not eligible to borrow. In fact, this is one clear indicator of the fact that public sector banks are not being forced to lend money to crony capitalists, as was the case earlier.

This is a big thumbs up for the Modi government. The bad loan problem of corporates is not going to go away overnight. The RBI is trying to tackle it in various ways, including getting banks to go after bid defaulters. Meanwhile, banks will go slow on lending to corporates and given this overall lending will continue to remain slow irrespective of the level of interest rates.

Also, it is important to point out here that retail lending has grown big time in the last one year. This means banks are comfortable lending to individuals because of the low default rate on loans.

Let’s also take a look at lending to what RBI categorises as services (tourism, hotels, restaurants, shipping, retail trade, wholesale trade, transport operators, computer software, commercial real estate etc.). The lending to the services sector grew by 10.9% in the last one year. In comparison it had grown by 6.6% between April 2014 and April 2015.

Hence, like lending to retail, lending to the services sector has also grown at a much faster rate, over the last one year. It is only lending to industry that has more or less remained flat over the last one year. And that as I have explained has got nothing to do with interest rates.

In this scenario blaming Raghuram Rajan for the slow growth in overall bank lending is incorrect. The overall bank lending will revive once the lending to industry revives. And that will only happen once the bad loans are cleared up.

The column originally appeared in the Vivek Kaul Diary on June 15, 2016