High rate of growth in bank lending and improved profitability of banks are being cited as signs of good health of the Indian economy. However, the fact that credit growth is driven by loans for consumption, rather than loans for production, is not a healthy sign. It is a dangerous trend. Moreover, the improved profitability of banks has been achieved at a very high public cost, including massive government spending to finance waiver of loans owed by capitalist defaulters, and charging much higher interest on consumer credit than the interest paid on deposits.
Outstanding bank loans in September 2023 are almost 20 percent higher than they were a year ago. Total profits of public sector banks were higher than Rs. 1,00,000 crores in 2022-23, as compared with a loss of Rs. 85,000 crores five years earlier. The government claims that these are very healthy signs which allegedly show that the Indian financial sector is in a position to support rapid economic growth in the coming years.
A more detailed analysis of who is getting more loans shows quite a different picture. Indian banks are giving more and more loans for personal consumption, rather than for industrial expansion.
Rapid Growth of Consumer Credit
A recent review of retail credit (loans given to individuals) in the RBI’s monthly bulletin pointed out, “retail segment played a major role in the recovery of overall credit growth (of banks) in the post Covid period.”
Whereas bank loans to industry have declined, retail loans to individual customers (home loans, loans for vehicles and consumer durables and on credit card) have increased. Data published by the Reserve Bank of India show that the share of loans to industry, trade and services has declined from 70 percent in March 2014 to less than 50 percent in March 2023. During the same period, the share of retail loans has risen from 18 percent to 32 percent.
Outstanding retail loans of banks in March this year amounted to Rs. 41 lakh crores, double the amount five years earlier. This has helped to boost the demand for various goods including building materials, televisions and other durable consumer goods.
Retail loans in India have been considered safe by the banks. As of March 2023, only 1.4 percent of retail loans have been classified as bad loans, or Non-Performing Assets (NPA).
Housing loans are a big part of the retail lending by banks. For the vast majority of individual borrowers in our country, home loan is the biggest investment they would ever make. Even if economic conditions turned bad, and people lost jobs, they would cut back personal expenditure sharply rather than default on their housing loans. This is in stark contrast with the loans borrowed by big capitalists, who frequently stop paying back to the banks, giving the excuse of ‘difficult market conditions’.
Banks are also keen to give more consumer loans as they are relatively more profitable. The interest margin is high for such loans. For example, the annual interest charged by most banks for housing loans is presently 8.5 to 11%, whereas the interest paid on savings bank deposits is only 2.75 to 3.5%. The interest rates on loans for durable consumer goods are even higher. The most profitable are credit card loans, where the interest charged by banks can be as high as 2.5 to 3.5% per month, which is more than 30% per year! Outstanding credit card loans have risen by nearly 30% in the past one year, to reach Rupees 2 lakh crores.
The experience of several developed capitalist countries shows that rapid growth of consumer credit is a dangerous trend. It serves to boost the demand for consumer goods, which benefits the capitalists who sell such goods. However, by inducing people to spend far in excess of their incomes, consumer credit increases the danger of people becoming bankrupt.
The financial crisis of 2008 in USA was the result of excessive and inflated loans given by banks for housing. The crisis led to the failure of many banks as people could not repay their loans. When banks took over the possession of homes for which loans were given, lakhs of people were rendered homeless.
The American people were pushed into a vicious personal debt cycle out of which they were never able to get out. The payment of interest and principal loan repayment took away a major part of their earnings. As a result, people were compelled to keep borrowing even to take care of their day-to-day needs.
There are already reports of danger signs in India due to the strategy of banks pushing retail loans. A recent report pointed out that the growth of consumption expenditure in the last decade has been more than household incomes, with the only exception being 2020-21, when lockdowns suppressed consumption.
The report pointed out that while income has not grown at the same rate as consumption, people had to spend either out of savings or by taking loans. The result is that household savings have significantly come down and at the same time their debt burden has gone up.
In 2009-10 and 2010-11, household debt was only slightly higher than household savings, implying that one year of savings was enough to pay off all household debts. In 2021-22, as much as 1.8-year worth of savings were required to do the same job.
In June 2023, the Reserve Bank of India’s (RBI) Financial Stability Report (FSR) pointed out that retail bank loans grew at a compounded annual growth rate (CAGR) of 24.8 percent between March 2021 and March 2023, which was almost double the growth rate for all loans taken together.
The change in the debt pattern of banks has also been necessitated by the lower demand for industrial loans from capitalists as they are not investing in adding further productive capacity.
Improving Bank Profitability – at Whose Expense?
The good financial health of banks and their capacity to give more loans has been achieved by a massive write off of loans owed by capitalist companies, financed by the central government budget. During the last nine years till 2022-23, a total of Rs 14.56 lakh crore loans have been written off by banks. The pace of write-offs was accelerated in the last five years when nearly Rs 2 lakh crore were written off every year.
This led to gross NPAs of public sector banks falling from the peak of over Rs 10 lakh crore to Rs 4.28 lakh crore by 2022-23. According to the Reserve Bank of India’s Financial Stability Report, the gross NPAs as a percentage of total loans have come down to a 10-year low of 3.9% in March 2023 from a high of 11.5% in March 2018.
The biggest beneficiaries of write off of loans are monopoly capitalists who receive the largest amount of loans from banks. The ten biggest borrowers among the monopoly houses together owed a total of Rs. 7,32,780 crores of loans to public sector banks (PSBs) as on 31st March, 2015. The list was headed by Reliance, Vedanta, Essar, Adani and Jaypee groups of companies. The monopoly houses manage to get such loans approved for any kind of investment or speculative gamble. As long as they reap maximum profits, they service the bank loans. When their expected profits are not realised, they stop paying the banks.
To make up for the losses incurred by PSBs due to such large write offs, the central government infused over Rs 3.4 lakh crore into the PSBs between 2014-15 and 2020–21. Without this infusion of capital, PSBs would not have been able to give further loans – whether retail or industrial. Thus, the present ‘good health’ of public sector banks has been achieved by writing off large amount of loans of monopoly capitalists.
It has been achieved at a huge public cost. Public funds have been used for the benefit of capitalist loan defaulters.
The fact that rapid growth in bank lending has been driven mainly by consumer credit is not a healthy sign but a dangerous trend. It is a sign that working people are borrowing more and saving less. The improved profitability of public sector banks is also not something to celebrate, because it has been achieved by spending massive amounts of public funds to write off loans owed by capitalists. It is also to be noted that banks are profiting by looting the working people, charging much higher interest on consumer credit than the interest they pay on savings deposits.