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Indian Banking is Going Retail in a Big Way. And That Makes Sense

May 3, 2018

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Regular readers of the Diary would know that we write regularly on the state of Indian banking. They would also know that Indian banks in general and public-sector banks in particular are not in a great shape. Lately, a few private sector banks also seem to be going the public-sector way.

But that is something that we have written about over and over again. Today, we will look at one of the effects of the bad loans accumulated by the Indian banks, on the lending carried out by them.

Let's start with Figure 1, where we look at the different kinds of lending carried out by banks, over the years. Figure 1 basically plots the total lending carried out in different sectors, during a particular year, and not the total loans outstanding in that sector, as of the end of the year. (It is important to clarify because many people tend to get confused between these two different data points).

Figure 1:

What does Figure 1 tell us? It tells us very clearly that until a few years back the lending to industry (represented by the orange bar) formed a bulk of the lending carried out by banks. From 2014-2015 onwards, lending to industry started to slowdown. In 2017-2018, barely any money was lent to industry by banks.

In 2017-2018, a total of Rs 19,434 crore was lent to industry by banks. This formed 3.3% of the total lending carried out by banks during the course of the year. In fact, retail lending during the course of the year stood at Rs 2,88,435 crore.

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The question is why is this happening? Public sector banks are not in the mood to lend to industry because of all the accumulated bad loans. As of December 2017, lending to industry formed nearly 73% of the bad loans of the public sector banks.

Over and above this, many public sector banks have been correctly placed under the Preventive Correction Action framework by the Reserve Bank of India. This makes it difficult for these banks to lend to the industrial sector.

In the past we have talked about the concept of narrow banking and why many of the smaller public sector banks should be kept away from lending to industry. Other ways need to be found to fulfil the funding requirements of industry. These include a viable corporate bond market, projet finance institutions which have the required expertise and the pension and provident funds with long term investment horizons, looking to buy these bonds.

The most important function of any bank is to lend the deposits it has raised from the public in a safe way. If that means not lending to Indian industry, then so be it.

Let's look at Figure 2 now, which plots the increase in retail loans and total bank loans given during the course of a year with respect to the previous year.

As can be seen from Figure 2, in the last four financial years, the retail loans given during the course of a year, have grown at a much faster speed than overall loans. Typically, when the lending to a sector rises at a faster pace than the overall lending, it is reason to worry, because at times, the quality of the lending tends to fall.

That doesn't seem to have happened in case of the retail lending carried out by banks. The overall restructured loans (bad loans + restructured loans) of the retail sector stood at 2.1% as of September 30, 2017. In comparison, stressed advances of lending to industry stood at 23.9%.

Basically, what is happening here is that the market is making banks do the right thing. It is moving them towards the kind of lending which is safe for them as well as their depositors. Also, even if a retail customer defaults, encashing the collateral (a genuine one, which doesn't seem to be the case with lending to industry many a time) is easier than it is in case of lending to industry.

Regards,
Vivek Kaul
Vivek Kaul
Managing Editor, Vivek Kaul's Diary

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Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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