Why banks love lending to you and me, but hate lending to corporates - Vivek Kaul's Diary
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Why banks love lending to you and me, but hate lending to corporates

Jan 6, 2016

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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.


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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 1,105,910 1,304,637 198,727 17.97%
Consumer Durables 14,660 16,545 1,885 12.86%
Housing (Including Priority Sector Housing) 594,603 705,235 110,632 18.61%
Advances against Fixed Deposits 55,339 60,458 5,119 9.25%
Advances to Individuals against share, bonds, etc. 3,861 6,886 3,025 78.35%
Credit Card Outstanding 29,486 37,646 8,160 27.67%
Education 62,721 67,682 4,961 7.91%
Vehicle Loans 119,410 137,887 18,477 15.47%
Other Personal Loans 225,830 272,297 46,467 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)
Nov.29,
2013
Nov.28,
2014
Increase
(in Rs crore)
Increase in %
Personal Loans 955,067 1,105,910 150,843 15.79%
Consumer Durables 9,987 14,660 4,673 46.79%
Housing (Including Priority Sector Housing) 510,171 594,603 84,432 16.55%
Advances against Fixed Deposits 56,032 55,339 -693 -1.24%
Advances to Individuals against share, bonds, etc. 2,832 3,861 1,029 36.33%
Credit Card Outstanding 24,147 29,486 5,339 22.11%
Education 58,953 62,721 3,768 6.39%
Vehicle Loans 97,914 119,410 21,496 21.95%
Other Personal Loans 195,028 225,830 30,802 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.

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.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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

Subba Rao

Jan 13, 2016

Hi Vivek,

In addition to the valid points made by you with regards to the Banks' preference for Retail loans, the following are also reasons for the Banks' orientation :

- Retail Lending gives opportunity for Risk Diversification.
- Margins in retail lending are higher than in Corporate Lending.
- Penetration of Bank credit among the populace has been growing steadily in the past decade or so. Hitherto, the only form of borrowing known to ordinary Indians was "Home Loans". New categories of loans have emerged over the recent years and Banks intend to leverage on this opportunity.
- Competition is far more intense in Corporate Lending that in Retail Lending given that there is such huge unexplored opportunity in the Retail space.

Regards

Subba Rao

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Girish Patkar

Jan 7, 2016

Reasons for the healthy retail portfolio are as under;

1. Retail borrower cannot inflate project costs.
2. Loan to Asset ratio is generally 0.75:1 or lower
3. Retail assets can be repossessed without too much loss in value.
4. Borrower has no recourse to the political system to avoid being classified as defaulters.
5. Small borrower is worried about his reputation in society.

Corollary us true in case of industry.

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Ralph

Jan 7, 2016

Banks in the west have access to printed money from QE. They do not care for people's deposits. They are only interested in borrowers with good credit standing. As the wag said a bank will only lend to those who do not need it.

In the past we could blame inflation on demand supply imbalance. Even today there is some indication of this - which is why for example my retailer of Jxxxr bathroom fittings does not have 3 pieces of any good design - he has only two !

Today we can see that Government of India wants its own nominees to vote or influence the rate setting decision. It will also want to take liberties with Debt management of the government. With Corporates un-interested in investment it is left to the Government to "pump prime" the economy.

So when will QE come to India ? or have we already had it without our knowledge because State Governments like Bihar and West Bengal are able to spend without earning ?

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DIlip Kulkarni

Jan 6, 2016

Dear Mr. Kaul,

I have a slightly contrary view. Look at the willful defaulters and people / industrialists who have more than 1,00,000 cr loans. it is very easy to understand why. one loan and you are done. you must have seen the messages on social media about various industrialists. only one has been declared willful defaulter. rest are not even touched or questioned. statistics can be deceiving. otherwise RBI guv would not be gunning for the policy to declare them as defaulters. check how many loans have been restructured.

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Satish

Jan 6, 2016

Nice

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