While consumer indebtedness instances and warning signs are lacking, the retail level shows signs of excessive borrowing, posing non-trivial risks of going overboard.
During a recent shopping expedition, we encountered a consumer offer that turned the concept of present-value of money on its head. We were looking to buy a refrigerator and were informed that if we opted for a no-cost six month equated monthly instalment (EMI) plan, we would get a discount. No such discount was available on making the full payment instantly.
Unconventional Offer: Pay Later, Pay Less
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%.
The analysis highlights several key nuances related to India’s household debt ratio and its implications. Despite having a household debt ratio slightly lower than the global emerging-market average, certain factors warrant attention.
- Positive correlation with income levels: As economies grow, their financial systems deepen, allowing higher levels of household debt. Wealthier economies like China, Taiwan, and Korea have higher household debt-to-GDP ratios, while countries with lower per-capita GDP such as Indonesia and the Philippines exhibit lower debt ratios.
- Non-mortgage debt in India: Research indicates that non-mortgage debt in India accounts for 27% of GDP, comparable to developed economies like the United States, Japan, and Australia. Interestingly, consumer loans like auto, personal, and agricultural loans constitute a significant portion of India’s overall debt, unlike the prevalence of home loans in other developing economies.
- Interest rates impact debt burden: Indian consumers face relatively high interest rates compared to other Asian countries, which increases the burden of household debt. This implies that the same level of household debt can be more onerous for Indian consumers than in many other countries.
Implications
Future income growth: The trend of borrowing against future earnings for current consumption indicates that sustained income growth is essential for Indian consumers to manage their debt burden effectively.
India’s household debt ratio in relation to per capita income levels has drawn attention to the use of personal loans for speculative activities. The potential use of such loans for activities like equity derivatives trading, investments in crypto assets, and online gaming raises concerns about potential asset quality problems for lenders, even without an income shock. The decline in India’s gross domestic savings ratio from over 32% to 29% in fiscal 2022-23 adds to the apprehensions. While some lenders have highlighted slightly elevated stress in specific consumer loan categories, there are no prominent warning signals at present.
The RBI’s proactive stance in increasing risk weights and tightening norms for unsecured consumer lending deserves recognition. However, the trend of rising consumption loans and the high proportion of customers with multiple active loans raise apprehensions. The warning signs of potential over-extension in consumer lending trends are a cause for concern, as highlighted in recent reports. Despite regulatory measures, the indulgence in such revelries continues, with potential long-term repercussions. The current scenario presents a sense of unpredictability and urgency in addressing these concerns.
The analysis underscores the importance of understanding the nuances of India’s household debt dynamics, from the composition of non-mortgage debt to the impact of interest rates on debt servicing. The implications point to the significance of economic growth and income stability in shaping the future trajectory of household debt in India.
