Banking Industry's new Danger?

Perhaps the Government's recapitalization plan will save the Banking sector from future issues but the fact is Banks appear to have embarked on a new gamble that looks risky on the face of it.

The Sectoral Deployment of Bank Credit Report

Gross Bank Credit stood at 72.07 Lakh crores on September 30, 2017, it was 69.17 lakhs crores a year ago. That is an expansion of 2.91 lakh crores in one year. Gross Banking Credit had expanded 7.15 lakh crores in one year between September 2015 and September 2016.

The steep drop in banking credit between 2016 and 2017 is in line with many other metrics of the economy (GDP growth for example)

Which sectors are doing badly compared to last year?

Industry sector which had expanded 0.23 lakh crores between 2015 and 2016 (september) has now contracted (-) 0.12 lakh crores versus last September

The much-touted Services sector which makes up for most of the economy had expanded by 2.58 lakh crores between 2015 and 2016 (September) versus just 1.16 lakh crores in the last 12 months

Agriculture sector which expanded 1.29 lakh crores between 2015 and 2016 (September) expanded by just 0.54 lakh crores in the last 12 months

Essentially all 3 productive components of the economy are trending downwards indicating very little desire for credit offtake in the economy. This is obviously not good news for the economy suggesting very little expansionary tendencies in the economy.

Which sectors are doing well this year?

All Personal loans which includes Housing, Vehicle Loans, Credit Cards, Other personal loans etc grew by 2.53 lakh crores this year versus 2.47 lakh crores last year. While this translates to lower growth %, it is still better given that the absolutes are marginally higher than last year.

Consequently, All Personal loans which made up for 20.2% of all outstanding credit in September 2015 increased to 21.7% in September 2016 has now increased to 24.3% of all outstanding bank credit

So what is the danger?

One, the banks are now almost completely growing on the back of households (Yes, the same households that are bearing the brunt of the increase in indirect taxes over the last 3 years).

Households (All personal loans) contributed to 37.6% of non-food credit growth between 2015 and 2016 (September), this has now shot up to 61.5% of non-food credit growth between September 2016 and September 2017. Essentially, households are now propping most of the banking sector growth.

But that is not the worse of it,

'Other' personal loans (assuming most of it is unsecured and to households, let us call it sub-prime lending for the purpose of sensationalization) now makes up for 29.3% of Non-Food credit growth versus just 10.7% of growth on September 30th 2016.

The fact that this 'other' personal loan segment is now contributing to nearly a third of the growth from just one-tenth of the growth indicates that Banks are willing to take a risk where there is an appetite. One can hypothesize that recapitalization is likely to lead to Banks lending more aggressively to these segments than Productive portions of the economy which are unlikely to demand more credit unless there is a jump in demand for their products and services. The significant jump in demand for 'other' personal loans is also indicative of a more sinister trend

It appears that more and Indians are having to live beyond their means and are willing to fund their lives by borrowing at high rates (Personal loans tend to be at higher than 10%) and this jump appears to have come mostly in the last 3 months.

The Banking sector is now mostly in the grip of households as far as growth is concerned and particularly dependent on 'Other' Personal loans which are mostly unsecured loans. This may be serving their short-term purposes but without a bail out of Indian households and spurt in consumer demand, no Government strategy is likely to work in the next 6 months. In the meanwhile the hard working Indian farmer and a favorable base may take us back to the 7%+ GDP growth number for the next 3 quarters. But is that enough?