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Rajan's Not Responsible for Slow Growth in Bank Lending

Jun 15, 2016


It is fashionable to criticise the Reserve Bank of India 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.

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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.

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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4 Responses to "Rajan's Not Responsible for Slow Growth in Bank Lending"

N Nagaraja Rao

Jun 15, 2016

It is very unfortunate that people criticizing Rajan have not gone into facts. As an industrialist they are supposed to know the efficient use of money. Any project must have a back up plan or an escape route in the case the project goes overboard. High leveraging with disregard to debt equity ratio has lead them into trouble and for the lucky ones the escape route is absconding from the country.
It is a case of a bad carpenter who blames the tools. For long we have got into the habit of treating bank loans as BAAP KA MAL and that is why we are in this situation today.


Atanu Gupta

Jun 15, 2016

Rightly analysed. Always blaming, pressurisation to Rajan. Only one agenda rate cut.there is some political or vest interest behind this. No investment should to be done to corporate houses. Totally mishandling .Wise steps taken by the banks.


UK Menon

Jun 15, 2016

Admitted that Retail Loans are growing faster and much safer for banks in the present scenario. But the main growth is in Housing Loans and the real estate market is getting saturated and has become almost stagnant. What if the real estate prices crash- which is quite possible if the demand comes down- will it not pull down the banks as well? We have the history of sub-prime lending crisis of USA where the real estate prices crashed drastically. Indian real estate prices are much hyped and they are much higher than the real prices and any prick of the bubble can severely affect the economy , banking in particular.



Jun 15, 2016

I have high respect for Dr. Rajan. But that cannot come in the way of suggesting a better approach. Firstly, IMHO, the banks primary duty is not to lend but to facilitate handling of Money for its customers. This has to be clear. When banks start giving ultra high returns for low risk activity then it leads to curbing appetite for even moderate risk takers. The High risk takers are wiped off. because the game is rigged. The rules of economics are that return should be proportional to the risk taken. The Retail Loan category are basically the middle class. It is important not to give them retail loans beyond a limit because they are encashing their future employment and salaries for luxurious life today which is not sustainable. This is what banks have to curb. Banks are doing this because at the rates set by RBI only such people will take loans from them. No sensible businessmen will take loans from them.

The RBI should only make sure that low risk takers who keep money in FD are not given high returns compared to high risk takers who invest in business

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