Retail banks’ loans as of July 31 stood at ??28.59 trillion. In contrast, loans to industry were a little less than ??28.25 trillion.
This is the first time that outstanding loans to individuals from banks have crossed loans to industry since these data are available from April 2007. Loans to individuals include loans granted to individuals for purchase. housing, cars, two-wheelers, etc. They also include outstanding credit cards and personal loans.
As the graph shows, lending to industry has slowed down considerably over the years. In five years, bank loans to individuals have more or less doubled, from ??14,480 billion ??28.59 trillion. During the same period, loans to industry have just increased by 7.2% to ??28.25 trillion ??26.36 trillion.
There are several reasons for the same. First, public sector banks, encouraged by the Reserve Bank of India, began to seriously recognize their bad debts as bad debts from mid-2015. Almost three quarters of these bad debts come from industrial loans. Bad loans from banks peaked at ??10 36.6 trillion in March 2018. Bad debts are loans that have not been repaid for 90 days or more since their maturity.
So over the years, unsurprisingly, banks have been reluctant to lend to businesses. They were once bitten and twice shy. Second, many industrial houses, having overborrowed between 2005 and 2013, are unable to borrow.
Even industrial houses that are able to borrow have had to deal with low capacity utilization due to slowing consumer demand, which makes no sense for them to borrow and grow. The spread of the covid pandemic has made matters worse.
Additionally, the companies that have raised capital to grow in recent years are mostly unicorns or private startups valued at over $ 1 billion. But given their loss-making business models, banks cannot finance them.
All of these factors have pushed banks towards retail lending. Interestingly, in July home loans made up about 51.3% of personal loans. This is down from the peak of 54.8% recorded in July 2015. It illustrates the slowdown in the real estate sector in the country.
In conclusion, it is worth asking how long personal loans can continue to grow without lending to industry also increasing. This is because loans to industry ultimately finance economic activity, which puts more money in people’s hands and increases their ability to borrow and repay loans.
Vivek Kaul is the author of Bad Money.
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