Retail Loans

The Recovery of Bad Loans from Large Borrowers Will Be a Big Challenge for Modi Govt

rupee

Earlier this week the Reserve Bank of India released the Financial Stability Report.

Among other things, this report talks about the inability of large borrowers to repay the loans that they have taken on from banks, in particular the public sector banks. The Reserve Bank of India defines a large borrower as a borrower who has taken on a loan of Rs 5 crore or more.

The Indian banking system has been trouble primarily because of the large borrowers and not the retail borrowers. As the Financial Stability Report points out: “Retail loans continued to witness the least stress.”

This can be seen from the following chart.

Asset quality in major sectorsChartThe chart makes for a very interesting reading. The retail loans remain the safest form of lending. The gross non-performing assets ratio (or the bad loans ratio) of lending to retail is at 1.8% of the loans given to the sector. Retail loans essentially include home loans, vehicle loans, credit card outstanding, loan against shares, bonds and fixed deposits, and personal loans.

As can be seen from the above chart, the bad loan ratio of retail lending is the least. This explains why 46% of lending carried out by banks between April 2015 and April 2016, has been retail lending. Between April 2014 and April 2015, 32.4% of all lending was retail lending.

Lending to industry is the most risky form of lending. As on March 31, 2016, the bad loans ratio had stood at 11.9%. Over and above this, the stressed advances ratio was at 19.4%. The stressed advances figure is obtained by adding the bad loans to the restructured assets. A restructured asset is essentially a loan where the borrower has been given a moratorium during which he does not have to repay the principal amount. In some cases, even the interest need not be paid. In some other cases, the tenure of the loan has been increased.

Hence, nearly one fifth of the loans given to industry are in trouble. Given this, it is hardly surprising that banks (in particular public sector banks) do not want to lend to industry. Bank lending to industry between April 2015 and April 2016, remained more or less flat.

Industries which have taken on loans from banks can largely be categorised as large borrowers or borrowers who have taken on a loan of Rs 5 crore or more. And this is where the basic troubles of Indian banks lie.

As the Financial Stability Report points out: “Share of large borrowers’ in total loans increased from 56.8 per cent to 58.0 per cent between September 2015 and March 2016. Their share in GNPA s[gross non-performing assets or bad loans] also increased from 83.4 per cent to 86.4 per cent during the same period.”

What does this mean? This basically means that large borrowers have been given 58% of all loans but they are responsible for 86.4% of the bad loans. In fact, the bad loans ratio of large borrowers stood at 10.6% as on March 31, 2016. As on September 30, 2015, it had stood at 7%. When it comes to public sector banks this ratio had stood at 12.9% as on March 31,2016, for large borrowers.

Hence, the bad loans to big borrowers have been going up. One reason, as I had explained in yesterday’s column is that the Reserve Bank of India(RBI) has been forcing public sector banks to recognise bad loans as bad loans. Up until now, banks had been passing off many bad loans as restructured loans.

Of course, even within the large borrowers there are many categories.

While banks are able to go after the small enterprises which have taken on loans and not in a position to repay them, the same cannot be said about the very large borrowers. As the RBI governor Raghuram Rajan had said in a November 2014 speech, the full force of bank recovery is “felt by the small entrepreneur who does not have the wherewithal to hire expensive lawyers or move the courts, even while the influential promoter once again escapes its rigour.” “The small entrepreneur’s assets are repossessed quickly and sold, extinguishing many a promising business that could do with a little support from bankers,” Rajan had further said on that occasion.

The Financial Stability Report does not give a detailed breakdown of large borrowers, but it does give us a very interesting data point about the top 100 borrowers among the large borrowers.

As the Report points out: “Top 100 large borrowers (in terms of outstanding funded amounts) accounted for 27.9 per cent of credit to all large borrowers…There was a sharp increase in the share of GNPAs [Gross Non-Performing Assets] of top 100 large borrowers in GNPAs of all large borrowers from 3.4 per cent in September 2015 to 22.3 per cent in March 2016.”

What does this mean? The loans given to the top 100 borrowers among the large borrowers constitute for 27.9% of all loans given to large borrowers. As on September 30, 2015, the bad loans of the top 100 borrowers among large borrowers amounted to around 3.4% of bad loans of all large borrowers. By March 31, 2016, this had jumped to 22.3% of bad loans of all large borrowers.

What does this tell us? It tells us very clearly that banks were treating its largest borrowers with kids gloves and not recognising their bad loans as bad loans. This could have possibly been done by restructuring their loans.

Thankfully, this game is now over. And for that both the RBI and the Modi government deserve credit. The bigger challenge now lies ahead. The government as the major owner of public sector banks needs to make sure that these largest of defaulters are made to repay the loans of public sector banks that they have taken on.

Given that, such a thing has rarely happened in the past, it will be interesting to see how the Modi government will go about this. If it can clean this mess up, then the phrase that telephones from the government to the public sector banks have stopped, will acquire a real meaning. Let’s hope for the best.

Watch this space!

The column originally appeared in Vivek Kaul’s Diary on July 1, 2016
 

It’s Not the Interest Rate, Stupid

ARTS RAJAN

This week there has been an overdose on Raghuram Rajan, the governor of the Reserve Bank of India(RBI) and his decision to not take on a second term. I guess some readers haven’t liked that. Nonetheless, it is important to discuss his ideas and thoughts, given that this is an opportunity to explain some basic economics, which many people don’t seem to understand.

I don’t blame them given the surfeit of reading material that is generated these days. I get many WhatsApp forwards with spectacularly illogical conclusions and many people seem to believe in them. One of the theories going around these days is that Rajan did not cut interest rates fast enough, and this impacted both businesses as well as consumers.

I have tried to counter this argument over the last one week in different ways. But given that I have limited access to data, some questions still remained unanswered. Governor Rajan though does not have these limitations. In his latest speech, made in Bangalore, yesterday, he explained in his usual simple style, as to why interest rates weren’t slowing down bank lending.

But before we get down to that, I would like to discuss something else.

In one of the many columns written to justify Rajan’s decision of not taking on a second term, BJP member and newspaper editor Chandan Mitra, wrote: “Rajan’s emphasis on increasing savings fell on deaf ears because the middle class was by now impatient to spend, not save.”

The insinuation here is that if Rajan had cut interest rates fast enough, the middle class would have borrowed and spent. This would have reinvigorated the Indian economy. But then the Indian economy grew by 7.6% in 2015-2016. It is fastest growing major economy in the world. So, I really don’t what Mitra was cribbing about. Also, Rajan has cut the repo rate by 150 basis points since January 2015.

Rajan in his speech made it clear through data that interest rates hadn’t held back bank lending. As he said:“The slowdown in credit growth has been largely because of stress in the public sector banking and not because of high interest rate.” Take a look at the following chart.

Chart 1 : Non food credit growthChart1 Non Food credit growth 

The yellow line shows the overall lending growth of the new generation private sector banks (Axis, HDFC, ICICI, and IndusInd) over the last two years. What this shows very clearly is that the lending growth of new generationprivate sectors banks has had an upward trend with a few small blips in between.

In contrast the lending growth of public sector banks (the blue line) has slowed down considerably over the last two years. Let’s look at the bank lending growth in a little more detail. The following chart shows the bank lending growth to industry over the last two years.

Chart 2 : Credit to industryChart 2 Credit to Industry 

As can be seen from the above chart, the lending to industry, carried out by the new generation private sector banks has been robust. In fact, in the last one year, it has grown by close to 20%. Hence, the new generation private sector banks have been lending to industry at a very steady pace.

When it comes to public sector banks, the same cannot be said. The lending growth has been falling over the last two years. Now it is in negative territory. In fact, due to this, the overall lending by banks to industry in the last one year was at just 0.1%. The figure was at 5.9% between April 2014 and April 2015. A similar trend can be seen from the following chart when it comes to lending to micro and small enterprises.

Chart 3 : Credit to Micro and Small EnterpriseChart 3 Credit to Micro & Small Enterprices 

This has led many people to believe that high interest rates have slowed down bank lending. As Rajan put it:“The immediate conclusion one should draw is that this is something affecting credit supply from the public sector banks specifically, perhaps it is the lack of bank capital.”

But as I have mentioned in the past, both public sector banks as well as private banks, have been happy to lend to the retail sector or what RBI calls personal loans.

These include home loans, vehicle loans, credit card outstanding, consumer durable loans, loans against shares, bonds and fixed deposits, and what we call personal loans. As I have mentioned in the past, retail loans have grown at a pretty good rate in the last one year.

The retail loans of banks have grown by 19.7% in the last one year. 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.

This is precisely the point that Rajan made in his speech. Take a look at the following chart:

Chart 5 : Personal LoansChart 5 Personal Loans 

In this graph, the retail ending growth of public sector banks and new generation private sector banks has been plotted. As can be seen, the two curves are almost about to meet. What this tells us is that when it comes to lending to the retail sector, the public sector lending growth is almost as fast as the new generation private sector bank. And given that the public sector banks are lending on a bigger base, they are carrying out a greater amount of absolute lending.

As Rajan put it in his speech: “If we look at personal loan growth (Chart 5), and specifically housing loans (Chart 6), public sector bank loan growth approaches private sector bank growth. The lack of capital therefore cannot be the culprit. Rather than an across-the-board shrinkage of public sector lending, there seems to be a shrinkage in certain areas of high credit exposure, specifically in loans to industry and to small enterprises. The more appropriate conclusion then is that public sector banks were shrinking exposure to infrastructure and industry risk right from early 2014 because of mounting distress on their past loan.”

This isn’t surprising given that banks are carrying a huge amount of bad loans on lending to industry. As the old Hindi proverb goes: “Doodh ka jala chaach bhi phook-phook kar peeta hai – Once bitten twice shy.”

As I have mentioned in the past, in case of the State Bank of India, the gross non-performing ratio (or the bad loans ratio) of retail loans 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.

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%. This is a trend seen across public sector banks. Hence, it isn’t surprising that public sector banks do not want to lend to the industry, at this point of time.

Take a look at the following chart, which plots the home loan lending growth of public sector banks and new generation private sector banks.

Chart 6 : Housing LoansChart 6 Housing Loans 

In this case, the lending growth of public sector banks is as fast as the lending growth of new generation private sector banks.

What all this tells us very clearly is that when it comes to the retail segment, public sector banks are lending as much as they can. This refutes Mitra’s point where he said that the middle class isn’t borrowing and spending because of high interest rates. If middle class wasn’t borrowing and spending, retail lending wouldn’t have grown by close to 20%, in the last one year.

In fact, credit card outstanding of banks has grown by 31.2% in the last one year, after growing by 22.9% between April 2014 and April 2015. So, I have really no clue as to what is Mitra talking about. Vehicle loans have grown by 19.7% against 15.4% earlier. Guess, it’s time he opened a few excel sheets before just mindlessly commenting on things.

Rajan summarised it the best when he said: “These charts refute another argument made by those who do not look at the evidence – that stress in the corporate world is because of high interest rates. Interest rates set by private banks are usually equal or higher than rates set by public sector banks. Yet their credit growth does not seem to have suffered. The logical conclusion therefore must be that it is not the level of interest rates that is the problem. Instead, stress is because of the loans already on public sector banks balance sheets, and their unwillingness to lend more to those sectors to which they have high exposure.”

To conclude, and with due apologies to Bill Clinton, “It’s not the interest rate, stupid!”

The column originally appeared on the Vivek Kaul’s Diary on June 23, 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, 2014Nov.27, 2015Increase(in Rs crore)Increase in %
Personal Loans1105910130463719872717.97%
Consumer Durables1466016545188512.86%
Housing (Including Priority Sector Housing)59460370523511063218.61%
Advances against Fixed Deposits553396045851199.25%
Advances to Individuals against share, bonds, etc.38616886302578.35%
Credit Card Outstanding2948637646816027.67%
Education627216768249617.91%
Vehicle Loans1194101378871847715.47%
Other Personal Loans2258302722974646720.58%

 

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, 2013November 28,2014Increase in Rs croreIncrease in %
Personal Loans955067110591015084315.79%
Consumer Durables998714660467346.79%
Housing (Including Priority Sector Housing)5101715946038443216.55%
Advances against Fixed Deposits5603255339-693-1.24%
Advances to Individuals against share, bonds, etc.28323861102936.33%
Credit Card Outstanding2414729486533922.11%
Education589536272137686.39%
Vehicle Loans979141194102149621.95%
Other Personal Loans1950282258303080215.79%

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