Buckle Up For the Ride

This from the Livemint:

As of March 2012, retail loans amounted to about 18% of the total loans outstanding in Indian banks. By March 2021, this had increased to 29%. By comparison, the share of loans given to industrial entities of all sizes has dropped from 45% to 30%. Retail loans grew at a compounded annual rate of 15.5% in this period, against 4.5% for loans to industry. The rebalancing accelerated after 2015 as retail loans maintained their pace, while the growth rate in loans to industry fell below 2%, showed data from the Reserve Bank of India (RBI).

https://www.livemint.com/industry/banking/retail-loans-set-to-become-largest-credit-segment-data-points-to-household-dist-11626154747295.html

Not just since the pandemic, then, but for a while now, retail loans have been more dominant.

But as the article goes on to say:

During the covid-19 pandemic, only two of the four main borrower segments have managed to borrow more from banks than earlier, the data showed. The retail segment is one of them, the other being agriculture and allied activities. Loans given to the services sector and industry saw a decline during the pandemic.

https://www.livemint.com/industry/banking/retail-loans-set-to-become-largest-credit-segment-data-points-to-household-dist-11626154747295.html

And then this, yesterday, from Deepak Shenoy:

There’s things textbooks and definitions, and there is practical experience:

But the takeaway is this: if other financial institutions are reporting “better” numbers, what weightage should you give this tweet in your mental model of the financial sector? Should this tweet worry you more than those numbers reassure you, or should it be the other way around? Why? What is Bayes’ theorem?

Finally, it is one thing to speak about the increase in retail loans. What about the increase in NPA’s?


If you are a student reading this, these are the questions I recommend you should be asking yourselves:

  1. What have NPA’s been like in past crises?
  2. Why have NPA’s risen so sharply for auto loans in this firm’s case?
  3. What can you conclude about all NBFC’s from this one report? Should you take a look at other firms reports? If so, which ones? Why? Re: the tweet above, how much can you trust them? Why or why not?
  4. What else might firms do to make their numbers look better, besides putting in cheques on the 30th of June? What does Google tell you about this? What do professionals tell you about this?
  5. What conclusion can you reach about the finance sector in India from your answers to the first four questions?
  6. If you were a finance trader, how would you have acted on your conclusions? What trades would you have tried to engineer?
  7. Do you see signs of such trades in the market?
  8. If yes, should you be reassured or worried?
  9. If no, have you figured out a way to trade that others have not? In other words, how confident are you of your conclusions, relative to what the market is saying? Why?
  10. Do you have the gumption to put your money where your mouth is? Will you bet your own money on the basis of your conclusions?
  11. Which questions have I missed out on asking? What else should I be asking, and why?

Try answering these questions, however basic your answers may be. After answering them, reach out to a finance prof, or a person from the industry, and ask them to help you make the list of questions longer, and your answers better.

It’d be a pretty good way to learn finance, irrespective of whether or not you “formally” study it as a subject, in my opinion.