Common household debt hits a new high! What easy loans mean for the economy and you
With consumers borrowing to buy everything from cars to cellphones, Indian household debt is estimated to have reached 15.7% of GDP in March 2018, according to a Macquarie study.
In 2012-13, the ratio was only 11.7%. With more credit history at their disposal, banks and non-bank financial corporations (NBFCs) have made loans easier. Total household debt at the end of March 2018, according to Macquarie’s estimate, was Rs 26.61 lakh crore.
According to experts, the change in attitude towards spending, coupled with the EMI (monthly equivalent payment) culture, will keep consumer spending intact even when interest rates rise. What is interesting is that the average size of the loan ticket is decreasing, suggesting increasing inclusion. A recent study by CIBIL – which has a database of nearly 250 million unique borrowers – noted that first-quarter personal loans rose 25% but the average balance fell 6%. He attributed the decline to the shift in the loan mix towards short-term consumer loans such as credit cards, personal loans and durable consumer loans. Personal loans are the fastest growing segment and, along with credit cards, dominate volumes while mortgages dominate exceptional value. The average retail loan balance at the end of March 2018 was Rs 4.02 lakh.
While the availability of credit history has made life easier for bankers, they also make better use of inside information to target retail clients. It is not surprising that the outstanding personal loans in March 2018, at Rs 19.08 lakh crore, increased sharply by 18% from the previous year, as data from the Reserve Bank of India reveals. .
Private banks in particular have taken advantage of their client franchises; at a leading bank, 50% of additional personal loans and 70% of additional credit card loans were made to existing customers.
However, it is the NBFCs that have been more aggressive in recent years to exploit the retail lending market. Crisil estimates NBFC outstanding credit at 21 lakh crore in March 2018, up 17% from the previous year; while mortgage loans represented a third of the portfolio, vehicle purchase loans represented a little less than a fifth.
The aggression of the NBFCs – which managed to mop up cheap money in an environment of abundant liquidity and cheap rates – resulted in a gain in market share. The rating agency estimates that the market share of NBFCs (excluding Crown corporations) and housing finance companies (HFCs) has increased to around 17-18% of the system’s total credits, against 13% over the past five years. “We expect this trend to continue, and their share is expected to reach nearly 19-20% by 2020,” said Krishnan Sitaraman, senior manager of Crisil.
It’s not just cheap money. According to Icra, home credit is expected to grow by 18% in the current year as homes become more affordable, especially for first-time buyers, thanks to incentives provided by the government. The good news is that arrears for HFCs (housing finance companies) are expected to stay in the range of 1.2% to 1.5%.
In a recent analysis of the increase in consumer debt in India, Swanand Kelkar, Managing Director of Morgan Stanley Investment Management, noted that at 15.7% of GDP, household debt in India is quite low by compared to emerging market standards for which the average is 39%.