The relatively high cost of money — or in other words, the interest rate — has evoked strong reactions from powerful quarters.
The Reserve Bank of India governor has been strident in his criticism of businesses taking loans and not returning them on the plea of a ‘bad business environment’, even as there is no perceptible drop in the loaner’s standard of living. The fact that the ‘bad loans’ have been advanced mostly by public sector banks, where the government is the majority stakeholder, has also not been allowed to go unnoticed.
After banks ‘discover’ that far too many of its ‘big’ borrowers have refused to return their money, the managements find it easy to raise interest rates for all customers to at least recover a part of the money lost to unscrupulous individuals or firms.
The end result is that you and I pay the exorbitant 10% interest on using the bank’s money, ensuring that the bank will effectively double the money it lends to us in around eight years at compounded growth rate.
The banking sector bleeds money to some, but does manage to stay afloat after ‘being harsh’ on the majority of its customers. This, of course, does not imply that all loans are not vetted properly. The problem is limited to a select few cases, but the magnitude of the cash given out and then written off (as per some reports it has been Rs 1.14 lakh crore) over the past three years is mind-boggling. Even if some of this is recovered and made available for circulation, the slowing business environment could see a big push.
Interestingly, even as interest rates continue to be on the higher side for our economy, which desperately needs to grow and grow fast enough to create jobs for the burgeoning population, there are side lanes in the credit system where one actually gets the money at a substantially low cost. Auto loans, for instance, can be a relatively pleasant surprise where you could be paying anything between 3% to 8%, depending upon tenure and amount, but the 3% figure can actually be very tempting.
This rate is also a reflection on the weak business environment where demand has stayed low for at least three years. The dominant thought is to get rid of inventory, even at the cost of a bit of your margin. The most interesting ‘event’ in the entire brouhaha over the cost of money is that some banks that do lend money cautiously and have a stellar loan recovery record can actually be making a lot of profit (all bank loan rates move together with only a modicum of difference) and thus use this to gain more business or develop new products.
“Being conservative has its advantages as then you can afford perks for good customers. A bank account is not just an account now; it is a service where the quality and experience has to be top-class. We offer a product where our customer having a certain type of card can access premium lounges at airports,” Govind Pandey, branch banking head, HDFC Bank, had told me once.