The other thing is, you know, what’s happening with the underlying forces behind any kind of GDP growth? Maybe the GDP numbers were a little bit below, maybe partially as expected. But when you look at the credit growth, does that indicate a problem? Or is looking at just bank credit underwriting not the right way to look at it simply because the city is not necessarily borrowing from the banks? I’m just trying to understand, from a growth perspective and then from a finance perspective, how do you think about this and the bank credit growth data? So are you minimizing the bank exposure? Can you tell me what you think about this, on the non-lending finance?
Abhay Agarwal: In fact, the data released especially last week has consistently suggested a slowdown which started around the time the RBI started tightening the screws on banks and further de-risking measures, increasing the risk weights on unsecured lending by banks, increasing the risk weights on NBFC lending by banks, increasing the risk weights/rates on housing finance companies and also imposing a number of restrictions on peer-to-peer lending.
As a result, people are not being able to borrow as easily as they did last year, especially for personal loans and credit card loans. This has led to higher borrowing costs, which has slowed credit in general, and we’re seeing that in the numbers now. Secondly, this has also led to slower demand at the Main Street level. So when I did a channel check recently, I was surprised to find that there just isn’t any inventory building up for discretionary spending or discretionary purchases this holiday season.
You know, there’s vehicle inventory, which is worrying retailers and retail dealers. Inventories of paint, tiles and other items that people would normally spend money on during the festive season are not piling up. So, clearly there is a slowdown in demand for discretionary spending, which is again driven by the rising cost of money, which is again reflected in the GST data.
As you can see, net of refunds, it was only 6.5%, whereas the government’s estimates were much higher. So I think the GST data is a good indicator of what’s happening at the underlying consumption level of the economy. And if GST collections slow down, that’s a very strong indication that domestic consumption is going to slow down in the short to medium term. So I think there are other issues related to banks.
So you asked a question, and our view on lenders, generally banks and non-banking finance companies, is that the peak cycle of margins was probably reached six months ago and now we are seeing rising cost of funds, cost of deposits. Deposits are becoming scarcer, cost to income ratios are rising across the board due to reduced rents, rising salaries, and then we are also seeing an increase in non-performing loans. As you know, the collection efficiency of the microfinance industry has fallen from 98% to 94%. So lenders, including banks, private banks, public banks and non-banking finance companies, are struggling on all fronts.
So in that environment, I don’t know what the next six months or a year will bring until the cycle turns again in favor of these banks. Investors will expect to see margins from lenders. Bank multiples are still the highest in the world, so I don’t see multiples expanding. So, I have a negative view on banks over the next six months to a year until margins pick up again, which we don’t see happening right now.
