Mumbai: A sharp jump in the credit card spending in the past one year indicates consumers have started buying more goods and services, which is perhaps an early sign of revival in Asia’s third-largest economy.
Credit card outstanding of Indian borrowers grew 26% to Rs.24,700 crore in the 12 months to November, marking a significant rise over the previous year, the Reserve Bank of India (RBI) data show. Credit card spending expanded 3.7% in the year ended November 2011. Before that, for two years credit card portfolios of banks had shrunk.
Trends in the unsecured loan market, primarily in credit card spending, are an indicator of credit appetite of individual borrowers, especially urban consumers.
Although the amount of credit card spending is not significant compared with the total loans in the banking system, a sudden spurt in such loans could, in turn, signal possible stress on bad loans in the banking system and overall consumer loan segment, economists warned.
It is for the first time since the 2008 global financial crisis that credit card spending has picked up at such a fast pace.
The credit card outstanding dropped to Rs.22,600 crore in November 2009 from Rs.30,000 crore in November 2008. The fall continued for the next two years till late 2011.
The reversal in trend is visible in the number of credit cards issued by banks, with the total number of cards issued rising to 18.5 million till October, adding 900,000 in the current fiscal year, RBI data showed.
If the growth registered in the past one year sustains, Indian banks’ credit card outstanding could soon return to the pre-crisis level of Rs.30,000 crore.
The jump in credit card spending has happened despite high interest rates. Banks typically charge between 20-40% for rolling over credit card outstanding. Some of the banks even charge 44%.
Analysts said banks are aggressively pushing credit cards as avenues for credit growth from other sources such as loans to small companies and housing, education loans have slowed. “There is virtually no major credit expansion in segments like industries and housing. This is one reason why banks are pushing up credit cards,” said Hatim Broachwala, analyst at Karvy Stock Broking Ltd.
For instance, loan growth to medium-sized industries declined to 3% in the 12 months ending November from 29% in the comparable period in the previous year. Growth in housing loans has remained flat and that of education loans halved during the period.
A. Prasanna, chief economist at ICICI Securities Primary Dealership Ltd, said the current spurt in credit card spending is mainly due to the combined effect of banks turning more optimistic about the quality of assets on such loans and improving credit appetite of consumers, which was absent in the past few years.
“People are no longer shy of taking loans. The convenience provided by credit cards over cash-based spending, too, have pushed up the credit card outstanding,” Prasanna said.
A significant part of the growth in the credit cards has been contributed by lower middle class consumers, who may not be fully aware of the high interest rates charged on such loans, according to Madan Sabnavis, chief economist at rating agency Credit Analysis and Research Ltd (CARE). “This could lead to asset quality concerns,” Sabnavis said.
The Indian banking system is already reeling under the pain of rising bad loans. Gross non-performing assets rose to Rs.1.67 trillion in September, up 47%, from Rs.1.14 trillion in the year-ago period.
The jump in the credit card outstanding could be attributed to the fact that customers, who have been on a “deleveraging mode” since the crisis in 2008, have come out of it and have begun taking credit exposure, said Sujan Hajra, chief economist at Anand Rathi Securities.
“Consumers have develeraged between 2008 to 2010. There is some level of improvement in at least the outlooks now, which has had a positive impact on the demand side,” Hajra said.
But, D.K. Joshi, chief economist at Crisil Ltd, the Indian subsidiary of global credit rating agency Standard and Poor’s, finds the trend conflicting with the India’s macroeconomic scenario. “When private consumption has declined and bank credit is not expanding as expected, one needs to find out the reasons behind the spurt in credit card outstanding needs,” Joshi said.