Do it yourself

However, in the past one year, the narrative seems to have changed somewhat. These days, it is not uncommon to find rising household credit being cited as a key risk to financial stability. The Reserve Bank of India and many analysts have mentioned this factor as a key stress point for the financial stability.

The latest Financial Stability Report released by the RBI notes that “At 40.1 per cent of GDP26, the stock of household debt in India is relatively low when compared to other EMEs, but in relation to GDP per capita, it is comparatively high. With overall household savings declining to 18.4 per cent of GDP in FY:2022-23 from an average of 20.0 per cent of GDP over 2013-2022, and coupled with an increasing trend in financial liabilities, household debt warrants close monitoring from a financial stability perspective.” It further notes, financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loan growth for financing both consumption and investment. Alongside, agricultural and business loans have also grown. Notably, more than two-thirds of borrowers are of prime and above credit quality.

In the post pandemic period, sector wise retail credit growth has remained the strongest. Personal loans have grown almost at 1.5x pace compared to overall credit growth. The growth of unsecured personal loans (including Credit card receivables, Consumer durable loans and Other personal loans) in banks from March 2017 to March 2023 stood at CAGR – 21.0 % outpacing the personal loan growth which exhibited a CAGR of 19% during the same period. Unsecured personal loans account for almost 1/3^rd of the overall bank’s personal loan credit of ~Rs. 41 lakh crores as of March 31, 2023.

Financial inclusion, transformation of consumer behavior, change in lenders’ focus, and enhanced leveraging of technology in lending are some of the reasons cited for the sharp rise in household credit. Household savings hitting almost 50 year low (~5% of GDP) is also one of the reasons for rise in household credit.

As per the recent data released by the RBI regarding sectoral deployment of the credit, the retail credit (constituting 1/3rd of the overall non-food credit) growth stood strong at 17.8% YoY in May’24. Within the Retail segment, credit growth stood strong across Housing (16.9% YoY), Vehicle Loans (17.9% YoY), Loans Against Gold Jewellery (29.7% YoY) and credit card outstanding (26.2% YoY).

It requires an in-depth study to establish whether the rising household credit is sustainable and good for the Indian economy, hence the markets, or a cause of concern.

As I mentioned earlier, this is something which everyone was looking forward to for a long time. Now since it is materializing, should markets be celebrating it or being worried about it!

In my view, dominance of consumers over producers is a natural evolution of growth. Almost every developed and middle-income economy has witnessed this transition in their course of development. India shall be no exception. The concern could be if it is too early for this transition in India, given the high level of poverty, infrastructure inadequacies, energy insecurity, and inadequate legal and regulatory framework.

I am not competent to comment on this. Maybe some experts will conduct deep research to conclude whether the “consumer finance” is already a mature theme in India or still a sun-rise sector. This will determine what kind of valuations should be afforded to the institutions extending unsecured personal loans.