Industry
Buy now, pay how? Inside the worrying surge in India’s household debt
Summary
- Over the last few years, fintech business models, such as ‘buy now, pay later’, have enabled easier retail loans. Non-banks targeted young borrowers, who splurged more and more on vehicles and consumer durables. Credit card loans have shot up, too. What are the implications?
New Delhi: In July, SBI Cards and Payment Services Ltd, the third-largest credit card issuer in the country, saw its non-performing assets rise for the first quarter of the current financial year. Provisions for write-offs rose by ₹51 crore from the previous quarter, while write-offs themselves rose by ₹105 crore over the same period.
Abhijit Chakravorty, chief executive of SBI Card, told analysts in a conference call: “The primary reasons for the increase in credit cost…is that customers obtained multiple trade lines from other lenders after taking a card, and this over-leveraging has impacted their repayment capacity."
The credit card business is a tough one and can be highly cyclical. Importantly, the business in general is the canary in a coal mine for economic conditions. When consumers start to feel the pinch, they typically don’t default on their ‘big-ticket’ loans at first, like home loans or vehicle loans. It’s the smaller-ticket loans, which tend to be not secured by any asset, that they tend to stop paying first. If this happens on a large enough scale, it's worth taking notice.
What Chakravorty said later in the call was worrying. He was asked a question on whether he saw any patterns in customer defaults, or whether defaults were especially strong for specific types of customers or ‘cohorts’ (for example, newer customers versus more established ones who have held an SBI Card for many years). To this, Chakravorty replied: “We find that the delinquency is moving across the segment. There is still no cohort identifiable. While, if we talk about vintage, we have seen accounts which have been doing well for the last four to five years also suddenly become delinquent. And the behaviour part is very unique. Once this account becomes delinquent, PDD [past due date], not a single penny comes. And that’s when we go for collection efforts, we largely find that there has been a lifetime event that has happened. That is one. Another is that, if you leave aside vintage, we have found the delinquencies going across salary, going across self-employed, going across tiers of cities."
In other words, the defaults that SBI Card was seeing, were happening across customer classes and across geographies.
SBI Card's experience is not exceptional. Household debt as a share of personal disposable income has risen by about 20 percentage points since 2011-12, with the bulk of that increase coming during and after the covid-19 pandemic.
Private consumption expenditure—what is spending by individuals on goods and services—accounts for close to 60% of India’s gross domestic product (GDP). An increase in household debt levels to the point where it becomes impossible for households to pay interest on loans has serious implications. These implications are not just for the ability of individual households to have enough to save or buy essentials, but for the economy more generally, especially one where personal consumption growth has been weak, falling last year to its lowest level in decades.
A household faced with an increasing burden of interest payments, and no additional sources of income (or increases in income), will be forced to cut back on expenditure. If this happens on a large enough scale, companies will see weak consumption reflected in their revenue and profits, and ultimately in their willingness to invest in new capacities. The government has been repeatedly exhorting the private sector to invest in new capacities. That’s not going to happen if companies see existing plant capacity remaining unused due to lower sales and demand.
Household consumption and investments account for around 70% of GDP. As analysts at Motilal Oswal, a financial services firm, point out: “If household spending remains subdued…and the government spending also grows slowly in order to meet its fiscal consolidation path, then the entire responsibility to keep nominal GDP growth intact at 11% falls on the corporate sector. This would be a tall task for the corporate sector (since it contributes only about 20-25% to GDP growth), and therefore underlines the urgent need for [household financial savings] to pick up in the coming years."
Borrowing habit
Households can save in two ways. They can invest in ‘physical’ assets like real estate or gold, or in financial assets like fixed deposits, mutual funds or shares. Most households don’t put 100% cash down for a house, but fund the purchase through a home loan.
At the economic level then, household savings, the main source of savings for the economy, is the sum of ‘physical’ savings (that is, buying a house) and ‘net financial saving’—the amount invested by households in bank deposits, stocks or mutual funds after netting out the instalments due on a loan or on credit card payments.
While households have increasingly invested in real estate over the last decade, leading to an uptick in ‘physical’ savings of households, this has also been accompanied by an increase in household debt, from about 30% of GDP in March 2015 to 38% in March 2023 and to around 40.1% currently. What’s especially striking is the sharp spike during and after covid when indebtedness spiked by four percentage points within the space of a year to almost 39%. It moderated after that, but picked up again, indicating that while the initial financial stresses caused by covid wore off, and the economy recovered, that recovery was temporary.
But the bump in retail lending by banks and non-banks to households didn’t start with covid. As a report by Crisil points out: “Regulatory changes in the early 2010s, wherein customers were required to share their data with credit bureaus, coupled with technological advances, made it easier for lenders to sanction personal loans."
The use of technology, especially driven by fintech business models, enabled easier loan processing in products such as buy now, pay later (BNPL) loans offered by online retailers. The weak pace of corporate loans meant banks saw retail lending as an easy way to push up margins. In demographic terms, non-banks and fintechs targeted younger borrowers—precisely the class of customers more interested in loans for ‘consumables’ rather than, say, housing loans.
Financing consumption
Household debt levels of 40% of GDP aren’t really all that high compared with other countries. China’s is at 66% of GDP, while those of the US and the UK are around 71% and 79% of GDP, respectively.
But, as India’s central bank notes, while these levels are comparatively low on their own, they are quite high when seen in the context of India’s per capita income. Countries such as South Africa, Mexico, Brazil and Poland all have per capita incomes higher than that of India but have lower household debt-to-GDP ratios.
There is a further twist. One could argue that if households take on debt to finance a house, that’s not necessarily a bad thing, since that loan goes towards building an asset, thus adding to household wealth. And while this is true, it’s also worth noting that there has been a shift in household debt away from housing loans and towards loans for discretionary items of consumption like vehicles, mobile phones and consumer durables.
Taking into account loans not just by banks but also by shadow banks or finance companies to households, Motilal Oswal estimates that non-housing debt as of September last year, accounted for around 32% of total household loans, while housing debt was around 29%. Business loans and loans to agricultural households made up the balance. The biggest category of retail loans now doesn’t go toward building a long-term asset but towards consumables. Vehicle loans are part of this category.
According to the Motilal Oswal report, within overall household debt, while the share of vehicle loans has remained stable at around 9-10% since 2018-19, a motley category of ‘other’ loans used to finance consumption—medical loans, credit card loans, consumer durables—have seen a sharp rise in share, from 14% to 19%.
Moderation ahead?
What does this mean? While housing debt in India is around 10-11% of GDP, non-housing debt taken by households is around 30% of GDP. These levels are comparable and even higher than non-housing debt taken by households in much more advanced economies.
So concerned was the central bank about the explosion in retail lending, especially unsecured retail lending, that late last year, it introduced measures which effectively raised the cost to banks of making unsecured loans to consumers. At the same time, it also introduced measures to discourage lending by banks to non-bank companies who are also active in the same markets, and who typically tend to be more aggressive than banks in lending to riskier classes of customers. It also introduced curbs on specific banks and loan products that it saw as high-risk.
While this did cool down growth in unsecured lending, the central bank has made it clear that this is the type of lending that they continue to worry about.
While such measures by the central bank are needed to stop banks and non-banks from running up heavy losses, they can cut both ways. In the short run, a loan taken to fund consumer durables, for instance, will show up as a boost to overall private consumption. But, as pointed out earlier, if this happens across the economy and beyond means, it’s not sustainable. Sooner or later, those loan instalments add up, and households either default altogether, or cut back on consumption.
Forcing a slowdown in the pace of unsecured lending will also have the side effect of accelerating any cutbacks in household consumption. “Overall, we believe that household spending (consumption+investments) is likely to continue to grow modestly…for the next few years, slower than [the] growth witnessed in the pre-pandemic years, until [household financial savings] comes back to a reasonable level of 7-8% of GDP," says Motilal Oswal.
“Over the long term…a sustained rise in incomes will be essential to bolstering and sustaining an uptick in India’s savings," says Crisil. The challenge for the government is generating jobs at a pace which will lead to such a sustained rise in incomes, and therefore savings.
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