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ShareWe live in a strange world.
Millions in India would like to buy homes to live in, or offices for setting up a new venture, or shops for starting a business. But buying real estate -- or renting it -- is still way beyond our means.
So we save our money in safe places waiting for that wonderful day when we can buy that home we need.
Or the office for the new venture we wish to start. Or the shop for the new store we wish to open. One of the places where we park our money is in bank deposits.
Much of it is parked in the PSU banks -- the public sector banks that are owned by the government of India. According to data from the Reserve Bank of India (RBI), PSU banks account for 74% of the total bank deposits in the country.
Well, what does the PSU bank do with all our money? They do what all banks are supposed to do: Lend it on to someone else at a higher price (the lending rate).
The difference between the lending rate and the borrowing cost (what the banks pays you for your deposits or what it may pay other banks and companies to borrow money) is a margin that needs to cover all the salaries and costs of maintaining a branch.
No harm in that -- if there was no profit in the banks, we would not have any banks at all.
But there is something interesting in the RBI data on what banks have done with your deposit money. But before we head there, we need to remind ourselves where the world was in December 2008.
Lehman Brothers had gone bust in September 2008.
Merrill Lynch had to be rescued by Bank of America in a shotgun marriage arranged by the US government. AIG had to be bailed out.
Indian companies, in general, had borrowed about $20 billion from foreign banks and investors. By October 2008, the foreign banks were told to send all their money back to "home country". Their parent banks were in trouble and they needed all the money back in safe US government or UK or Euro-government bonds.
Foreign banks were not only refusing to lend any new money to any Indian company, but they wanted all the loans that were falling due returned. They refused to "revolve" or extend the loans.
To add doom to the gloom, many mutual funds were holding debt issued by Indian real estate companies and these companies were not able to repay this debt.
The Indian companies had parked their surplus cash with these mutual funds. They now wanted it back (to repay their foreign bank loans or for use in their own operations), and
the mutual funds could not repay it. Ouch!
The Indian stock markets were collapsing.
And the general consensus was that the Indian stock market could head as low as 4,000 to 6,000 levels from the 8,000 levels of the 30-share BSE Sensex.
And the final knock-out punch: The sale of shares by foreign investors (speculators will be more accurate) to the extent of Rs 70,000 crore and the act of converting this into dollars led to a decline of about 30% in the Indian rupee in the year 2008.
Even the sweet and normally confident anchors on TV channels looked like Rakhi Sawant a day after being with a child.
The financial newspapers stopped publishing photographs of attractive models to add colour to their India fantasy stories.
That, then, was the India we were in. December 2008.
Please roll back your mind to that period.
And add the spice: There was an election coming up. Which many believed (eh, not me) could take India into the bullock-cart age.
Let's take a quick peek at what was happening to real estate developers. People had stopped buying real estate. The developers were about to go bust. They were desperate for cash. There was no money inflow from the sale of real estate.
But there were debts to be repaid.
And the real estate developers also had payment obligations for all the land that they had agreed to buy as they went about building their "land banks".
In this environment, what were the PSU banks doing? They were pretty busy lending money for real estate.
Between May 23, 2008 and May 29, 2009, the loans given by banks (excluding the loans made for agriculture) grew by 18% -- from Rs 21.74 lakh crore to Rs 25.58 lakh crore.
But the loans given to real estate grew by 52% -- from Rs 62,178 crore to Rs 94,499 crore.
This period is for May 2008 to May 2009 -- in a few weeks, we will get data for the period October 2009 over October 2008.
That data will probably be more telling. But even this "old" data shows the huge rescue of the real estate developers. It should be noted that "loans to real estate" does not include the loans made to individuals who borrow money to purchase their homes. Those mortgage loans grew by 5%, confirming the data from the real estate industry that home-buying has slowed down considerably.
According to industry estimates (and a research report by a foreign stock-broking house), the growth in the number of new homes sold in five cities (Bangalore, Mumbai, Chennai, Gurgaon, Hyderabad) has declined.
Between April, May and June of 2008, there were 15,000 units sold in these 5 cities. This works out to an average of 33 units per day per city.
