Stressed with bad loans, 40% of bank deposits have gone into govt bonds

Jul 2, 2015

- By Vivek Kaul

Vivek Kaul
One of the key themes that I have explored in The Daily Reckoning in the recent past is the mess that public sector banks are currently in. In this column I take the story forward.

A recent research note by Capital Mind carries out some very basic analysis to make a very important point.

As on June 12, 2015, the total deposits of the scheduled commercial banks in India stood at Rs 87,664,60 crore. During the last one year the total deposits of the banking system has gone up by Rs 8,65,570 crore or around 11%.

Banks raise deposits to give them out as loans. And where is this money going to? The total investment of banks in government securities as on June 12, 2015, stood at Rs 26,38,490 crore. This was up by 15% or Rs 3,45,370 crore, over a one year period.

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What does this tell us? Of the Rs 8,65,570 crore raised by banks as deposits over the last one year, Rs 3,45,370 crore or around 39.9% has gone into government securities. This when the statutory liquidity ratio is at 21.5%. This means that for every Rs 100 banks raise as deposits, Rs 21.5 needs to be compulsorily invested in government securities.

But over the last one year banks have invested Rs 39.9 of every Rs 100 raised as deposits into government securities, instead of the Rs 21.5 that they compulsorily need to do.

How did the situation look in June 2014, a year earlier? Over a one year period as on June 13, 2014, around 18.7% of the deposits raised by the scheduled commercial banks had been invested in government securities. This has now jumped to close to 40%.

Lending to the government is the safest and the easiest form of lending. It reminds me of the old Hero Honda advertisement which came with the tagline-fill it, shut it, forget it. Banks in India are precisely doing that over the last one year.

The Reserve Bank of India does not provide data for private sector and public sector banks separately. My guess is that in case of public sector banks as a whole, the total proportion of deposits invested in government securities would be higher than 40%, over the last one year.

This is understandable given that the stressed assets of public sector banks have shot up dramatically in the recent past.

The bad loans of the Indian banking system as a whole stood at 4.6% of the total advances as on March 31, 2015. This has shot up from 4% as on March 31, 2014. Within this the numbers of public sector banks look very bad.

The stressed assets of public sector banks stood at 13.5% up from 11.7% as on March 31, 2014. The stressed asset of the overall banking system stood at 11.1% up from 10.7% as on March 31, 2014. In case of private banks the number stood at 4.6% of the total advances.

hat does this mean? The total amount of stressed assets are essentially obtained by adding bad loans and restructured loans. This number is then expressed as a percentage of the total assets held by the banks.

Hence, the borrower has either stopped repaying the loan he had taken on or the loan has been restructured, where the borrower has been allowed easier terms to repay the loan by increasing the tenure of the loan or lowering the interest rate.

Stressed assets of 13.5% in case of public sector banks essentially mean that out of every Rs 100 that banks have given out as a loan, Rs 13.5 has either turned bad or is in dicey territory as it has been restructured. In the recent past many of the restructured loans have turned bad.

The public sector banks have been unable to recover these loans given that big business remains the number one defaulter of bank loans. As the recently released RBI Financial Stability Report points out: "As the report points out: "Sectoral data as of December 2014 indicates that among the broad sectors, industry continued to record the highest stressed advances ratio at 17.9 per cent followed by services at 7.5 per cent. The retail sector recorded the lowest stressed advances ratio at 2.0 per cent. Private banks had the highest share of retail loans in their total loans at 27.7 per cent as against 17.1 per cent for public sector banks."

This explains why banks have been lending more and more money to the government. The finance minister Arun Jaitley has been talking about lower interest rates for a while now. But lower interest rates haven't led to any improvement in lending. Sadly, all it seems to have led to is banks lending more to the government.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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