Credit balances are growing, thanks to the increasing demand for credit cards and personal loans. In an economic slowdown where salary delays and job loss is inevitable, the rise in demand for consumption lending products seems quite obvious. A recent report shows a spike in outstanding balance on credit cards indicating that people are borrowing to meet their everyday expenses.
According to the India Retail Credit Trends report by TransUnion Cibil, consumer credit grew (at lower rates) in Q3 of CY 2019 fuelled by a spike in demand for categories such as personal loans and credit cards. However, overall balances across all consumer loan products increased only by 13% compared to 23.2% the last year. Demand for auto loans, home loans and loans against property fell between July and September 2019, while demand for consumption lending products increased.
Credit card balances and number of accounts increased by 40.7% compared to 29.8% during the same time last year. This pushed the total balances to ₹1,090 billion and the number of active cards in circulation to 44.5 million. New account volumes of personal loans recorded dramatic growth of 133.9% in Q3 2019 as consumer demand for the credit product continued to accelerate, said the report.
“Growth in credit cards outstanding is significant at this point of time as it does mean that credit is being used for meeting daily requirements. With growth in consumption being more or less stagnant, higher use of credit cards does indicate that households in the lower income levels are meeting daily requirements by borrowing," said Madan Sabnavis, chief economist, CARE Ratings.
The Cibil report shows that personal loans balances increased by 28.0% in Q3 2019 compared to the previous year. Balances in semi-urban and rural locations increased by 31.5% and in metro and urban locations the spike was by 25.8%. With almost 7.3 million personal loan accounts originating between July and September 2019, the origination volumes have more than doubled over Q3 2018. The company also found that almost 42.6% of the personal loan acquisitions are from individuals between the age group of 18-30 years.
“As we have seen, there has been a retail boom which is being supported by retail credit of which demand for credit cards is most rampant. The transactions are of a lower denomination at this level but do aggregate to a high amount. There has been some aggression shown by banks in selling credit cards with several offers thrown in," said Sabnavis. “When incomes are stagnant and there aren’t adequate jobs in the economy, there’s a tendency to depend on credit which becomes a habit. Banks must monitor this to ensure delinquency doesn’t increase."
Meanwhile, the decline in demand for passenger vehicles has decelerated the growth of auto loans. Auto Loan balances increased only by 10.3% in Q3 2019 compared to 16.8% last year. Home loans, which make for about 50% of the total consumer credit portfolio, too saw slower growth in the quarter. “Aspiring buyers are putting off purchase decisions because they lack confidence," said the Cibil report. Home loan balances grew at 10.0% in 2019 compared to 20.3% in 2018.
“Auto and home loans are seeing saturation because cards and loans are being used for consumption purposes. Because cards are marketed at 2-3% per month, often people don’t realize the high interest cost which works out to over 30% per annum. Hence, it’s important to ensure you borrow only what you can repay," said Sabnavis.