In several columns in the past, I have pointed out the bad state India’s government-owned banks are in. In fact, as of March 31, the total bad loans of these public-sector banks amounted to 8,956 billion rupees (US$131 billion), or 15.6% of the total loans given by these banks. Bad loans are those on which a payment has not been made for a period of 90 days or more.
This basically means that a little under one-sixth of the loans of these banks are non-performing. In many cases the outstanding bad loans are much more than the total net worth of these banks. Clearly, there is a major problem.
Having said that, the government would like us Indians to believe that the faith that people have in these banks continues unabated. In a recent reply to a question raised in the lower house of the Indian Parliament, the government said: “Punjab National Bank (PNB) has apprised that the bank’s domestic deposits have increased by 348 billion rupees during the financial year (FY) 2017-18, and that more than 100,000 new accounts have been added during the year. This suggests that depositors continue to have confidence about safety of their deposits with the bank.”
This is the trouble with looking at absolute numbers of just one bank. How do we figure out whether Indians continue to have faith in public-sector banks? We do that by answering a simple question: At what pace are deposits held by Indians in public-sector banks growing?
Let’s look at Table 1, which lists the total deposits (in billions of rupees) held by the public-sector banking system in India over the years.
Table 1: Public Sector Banks
The table tells us that the deposits with public-sector banks have been growing over the years. But the growth in deposits had slowed to 3% between the end of March 2017 and the same date in 2018.
Is this slowdown because people are not saving as much as they did before, or is there something else to it?
Take a look at Table 2, which lists the total deposits held by banks in India (public-sector banks, private banks, small finance banks, foreign banks and regional rural banks).
Table 2: Banks in India
The table here tells us very clearly that overall deposits of banks in India have grown by 7%, which is slower than in the past, but it is much faster than the overall growth in deposits of public-sector banks.
Table 3 basically plots the total deposits held by private-sector banks over the years.
Table 3: Private Sector Banks
From the table above it is very clear that the deposits in private-sector banks continue to grow at a very robust rate. Given this, the problem is with public-sector banks.
In a few cases, the Reserve Bank of India has asked banks not to collect fresh deposits. In other cases, the only credible explanation lies in the fact that the confidence that Indians had in their public-sector banks has fallen a little, with deposits growing at their slowest pace since 2013.
While this drop in confidence currently seems to be very small, if the bad-loan problems of these banks continue, it will only accentuate the decline in confidence in the days to come.