Should India worry about retail loans growing furiously?

In effect, we were being told that if we paid later, we would pay less. While a large part of this discount is funded by the appliance manufacturer, some of it is picked up by the lender that provides the EMI option. Their customer analytics probably tells them that a certain proportion of customers who avail such offers delay subsequent payments. In those cases, they can charge a usurious rate of interest which ends up subsidizing the customers who pay on time. This could give a nice bump-up to loan growth, which is a metric that investors closely track, even as more consumer data is stored that can help cross-sell other products as an added advantage.

The old Hindi line of “Aaj nagad, kal udhaar" has given way to credit discounts, and consumers seem to have enthusiastically jumped onto this bandwagon. This is evident in the recent net household financial savings data that the Reserve Bank of India (RBI) published. At 5.1% of gross domestic product (GDP) in 2022-23, it has fallen to a multi-year low. Importantly, it is a steady increase in financial liabilities that has been the main contributor to lower net savings. A simultaneous trend can be observed in the country’s household debt-to-GDP ratio, which has gone up by almost 5 percentage points over the past five years to about 40%.

While India’s household debt ratio is slightly lower than the worldwide emerging-market average of 49%, there are a few nuances to be mindful of. First, household debt ratios are positively correlated with per capita income levels. As economies get richer, financial systems deepen and household incomes can support higher levels of debt. Among large emerging markets, it’s only the richer economies of China, Taiwan and Korea that have a household debt-to-GDP ratio in excess of 60%. Indonesia and the Philippines, with per-capita GDP lower than $5,000, have household debt ratios of 19% and 26% respectively.

Second, research by Motilal Oswal Securities estimates that non-mortgage debt in India is at 27% of GDP. This is comparable to developed economies like America, Japan and Australia. In a developing economy, home loans tend to account for a bulk of household debt, but in India’s case, it is other types of consumer loans like auto, personal and agricultural loans that seem to account for a larger share of overall debt.

Third, any debt ratio has to be viewed in the context of the interest rates that are charged on it. Indian consumers face one of the highest rates of interest in Asia, which means that the same level of household debt tends to be a lot more burdensome in India than in many other countries.

The implications of these trends are not hard to fathom. For one, Indian consumers are effectively borrowing from their future earnings to consume goods and services today, which means strong income growth is a necessary condition for this trend to continue.

Also, it is hard to trace the end use of personal loans advanced, and if some of these are being used for speculative activities like trading in equity derivatives, investments in crypto assets, online gaming etc, it can create asset quality problems for lenders even without an income shock. While India has seen corporate credit cycles in the past, we have not really seen a full-fledged consumer credit cycle. This means we are not aware of all the fault-lines if stress levels were to worsen. At a macro level, lower household savings crimp the country’s investment ratio, all else being equal, and over the last five years, India’s gross domestic savings ratio has declined from over 32% to 29% in fiscal 2022-23.

So, is this reason enough to be alarmed? Apart from a few lenders highlighting slightly higher stress in certain consumer loan categories, there aren’t any warning signals. RBI’s most recent Financial Stability Report sounded no alarm bells either with respect to overall retail credit quality, even though it highlighted some instances of consumer indebtedness. About 43% of customers availing consumption loans already had three other active loans, and about 30% of customers had availed more than three loans in the past six months. A few years ago, we noted the trend of rising consumption loans in these pages , highlighting what its enablers were. At that time, we wrote: “Like all powerful trends, this trend could be prone to getting over-extended in due course of time."

RBI deserves credit for pre-emptively increasing risk weights and tightening norms for unsecured consumer lending. But some revelries are so intoxicating that warnings do not dampen the spirit of revellers. In the context of these trends at this point in time, we are dancing in a room in which the clock has no hands.