Home / Industry / Banking /  Does the jump in retail credit indicate higher indebtedness?

Mumbai: The average Indian is typically described as a saver more than a borrower. But could that be changing as young urban Indians turn increasingly aspirational and consumption-oriented?

A resurgence in unsecured personal loans in the banking sector over the last two years certainly suggests so, although bankers say the level of indebtedness is not as high as in the years before 2007.

The outstanding balance on credit cards, considered as a proxy to discretionary spending, has surged by 39% between April 2014 and February 2016, data from the Reserve Bank of India shows. Between April 2014 and December 2015, the banking system added 35 million new credit cards and the outstanding amount on these cards has risen by 9,742 crore.

Other personal loans, mostly unsecured, have also grown at a pace of about 20% during fiscal 2015 and 2016, the data shows. This is nearly double the rate of growth of overall credit. Credit growth has stayed close to 10% since the start of 2015.

Bankers have taken note of this trend but say it is not something to worry about yet. “The tendency to have multiple loans is there as aspirations go up. The level of indebtedness is going up but not to a level which may be alarming," said S.K.V. Srinivasan, executive director at IDBI Bank.

The growth in unsecured loans has largely been from urban centres, especially metropolitan cities, said Shanthi Ekambaram, head of consumer banking at Kotak Mahindra Bank. “They are more metro-centric and the largest comes from metros. So from top eight cities and even in the next rung of cities, there is immense opportunity," said Ekambaram.

She added that the spectrum of individuals that borrow has widened with even the mass affluent not averse to borrowing now, even though they may not need loans at the outset.

It is not just the middle income or those in dire need of credit who borrow but also those who want to leverage on their credit profile rather than deploy cash, she said.

What has enabled people to borrow more and will trend this continue?

Bankers say the launch of credit scores has eased the process of borrowing.

In addition, banks are pushing retail loans to improve credit growth and emerging digital channels have made it possible to borrow within minutes.

“The credit score by CIBIL is making it easier for people to borrow more," said Srinivasan.

CIBIL was the first credit information bureau set up in 2006 that imports customer details from banks, including the repayment history and gives a score to the borrower which makes it either easy or difficult to get loans from banks.

Cross selling of loans has also contributed to a rise in individual borrowing.

According to Ekambaram, cross-selling loans to customers acquired through the savings account route gives the bank an edge as there is already an established transaction history of the customer.

An executive at Canara Bank, requesting anonymity, as he is not authorized to speak with the media explained that the increase in personal loans is coming largely from existing customers.

“Home loan borrowers are fresh loan customers, at least for us, and a very small part is actually refinance. But car loans, credit cards, personal loans are usually given by the bank to an existing customer through cross-selling," he said.

Home loans for banks have grown at a consistent rate of 15-17% over the last five years.

But bankers say that indebtedness is not at uncomfortable levels and the situation is better than in the years before the financial crisis.

The economic slowdown after the global financial crisis in 2008 led to heavy defaults on credit card debt and other unsecured loans, forcing many banks to cut back on growth in this segment.

“If we compare with 2007 levels, indebtedness is down. After 2007, a lot of unsecured credit went out of the market. But in the last year-and-a-half, the unsecured lending has come back. Which is why the growth rate is looking fairly large compared with the previous years," said an executive at a private bank requesting anonymity.

Srinivasan of IDBI Bank and Ekambaram of Kotak Mahindra Bank concurred with that view.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Edit Profile
My ReadsRedeem a Gift CardLogout