Industry
It is easier than ever for Indians to borrow. So why aren't they spending more?
Summary
- iPhones, expensive cars, beautiful clothes and longer holidays. We are buying them on credit. In 2023-24, bank lending to retail grew 27.5%— the fastest pace ever. In contrast, private consumption grew 8.5% during the year, almost at its slowest pace in two decades. We explain the mystery.
Mumbai: I take my evening walk on the Prabhadevi-Dadar beach in Mumbai. On many days, one can see the full length of the Bandra-Worli Sea Link, along with beautiful sunsets changing from crimson red to violet in colour. Indeed, Mumbai is very beautiful in long shots.
What these long shots don’t show is all the debris that the sea throws back every day. Once one sees the beach littered with debris—which the local municipality is either lethargic about cleaning up or perhaps struggling to—one realizes that the setting is not as beautiful once the picture is complete.
The Indian economy is a tad like that. In 2023-24, the size of the economy or its gross domestic product (GDP) grew 8.2% in real terms adjusted for inflation, a very good growth figure.
Nonetheless, the private consumption expenditure, the money you and I spend on buying things and the largest part of the economy—which over the years has formed around 55-60% of its size—grew by just 4%, the slowest since 2002-03, ignoring the pandemic year of 2020-21.
In nominal terms, not adjusted for inflation in 2023-24, private consumption grew 8.5%, the slowest since 2004-05, ignoring 2020-21.
At the same time, in 2023-24, the growth in retail lending by banks was at its highest ever level, since data first became available in 2008-09. Retail lending by banks comprises housing loans, vehicle loans, education loans, credit card outstandings, personal loans, loans given against fixed deposits, shares, bonds, gold jewellery etc. Typically, one would assume that retail lending growth and private consumption growth would have a strong correlation.
In 2023-24, retail lending of banks grew 27.5% and private consumption grew 8.5%, the former at its fastest pace ever and the latter almost at its slowest pace in two decades, leading to a situation where the difference between the two, was at its highest ever level (see chart). This difference has been significantly high in three of the last five financial years, in comparison to the years before that.
So, what is happening here? What are the impacts of this dichotomy? We will try answering these questions and more in this piece.
Retail Aggression
In 2007-08, the bank lending to industry stood at 17.5% of the GDP. Their retail lending was at 10.7%. The lending to industry peaked at 22.4% in 2012-13 and has been falling since. In 2023-24, it stood at 12.4%, the lowest since such data became available from 2007-08 onwards. In fact, retail lending by banks first overtook their lending to the industry in 2020-21. In 2023-24, it stood at 18.1% of the GDP, the highest level ever (see chart).
Essentially, over the years, banks have become more comfortable carrying out retail lending.
This is an impact of the bad loans problem they had to face in the 2010s primarily on account of corporate loan defaults. Also, corporate investment growth continues to remain on the slower side, limiting lending opportunities.
Further, the overall retail lending of banks is higher than 18.1% of the GDP because banks also lend to non-banking finance companies (NBFCs), which carry out retail lending. In 2023-24, the bank lending to NBFCs stood at 5.2% of the GDP, the highest ever.
In fact, there is some reason to worry on this front. As the Reserve Bank of India's (RBI’s) latest Financial Stability Report (FSR) stated: “In the consumer credit segment, there are a few concerns...First, delinquency levels among borrowers with (retail loans) below ₹50,000 remain high. In particular, NBFC-fintech lenders, which have the highest share in sanctioned and outstanding amounts, also have the second highest delinquency levels, only below that of small finance banks."
Indeed, the sharp growth in bank lending to NBFCs from 2.5% of the GDP in 2016-17 to 5.2% in 2023-24, suggests the rise of fintech's lending money. Also, with loans easily available over a smartphone, there has been a drop in lending standards at the lower end of the market, leading to higher delinquencies.
The Structure
When it comes to retail loans, the division between housing loans and non-housing loans is around half and half. In the last five years, from the end of 2018-19 to the end of 2023-24, non-housing retail loans have grown by 19.7% per year on average. In comparison, housing loans have grown by around 18.6% per year on average. But this comes with a disclaimer. A good portion of housing loan growth came between the end of 2022-23 and the end of 2023-24, when they grew 36.7%. If we look at the four-year period between 2018-19 and 2022-23, they have grown at a much slower pace of 14.5% per year on average.
So, what does the fast growth in non-housing retail loans tell us? As a January 2024 news report in the Business Standard pointed out: “The average selling price [of a car] has gone up from ₹7.65 lakh in 2018-19 to ₹11.5 lakh in 2023-24, up by over 50%."
This is because most buyers now want to buy higher end variants and not because cheaper cars are no longer available. A December 2022 news report in The Times of India said: “70% of iPhone purchases in India are on EMIs." While this news report is more than a year old, there is no reason to believe that this situation would have changed materially by now.
Indeed, buying expensive depreciable assets like cars and mobile by taking on a loan—as the writer Jonathan Raban puts it in Soft City in a slightly different context—is “to enhance the identities" of their purchasers. “Their most important function is to tell us something about the people who buy them; they belong to the hazardous but necessary urban art of self-projection," writes Raban.
What explains this? We live in an era where people are perpetually scrolling on their smartphones to watch reels and shorts in which other people are trying to tell the world at large what a good time they are having—with better phones, more expensive cars, more beautiful clothes and longer holidays. People watching these reels are needled to join in, by buying more expensive cars and phones, on credit. People don’t want to wait.
This also explains to some extent why the total outstanding amount on credit cards and personal loans has jumped from 3.6% of the GDP as of the end of 2018-19 to 5.6% as of the end of 2023-24. People are using these modes to spend more to keep up with the Sharmas. Some may say this is revenge consumption post the pandemic.
The RBI is worried about this fast growth in retail loans. As it points out in the latest FSR, the vintage delinquency of retail loans remains relatively high at 8.2%. Vintage delinquency is defined as the percentage of accounts that have become delinquent—that is loan repayment hasn’t happened for 90 days or more—within twelve months of origination of the loan. Of course, this is not a problem at the banking sector level because the large retail loans, that is vehicle loans and housing loans, are not being defaulted on, but smaller ones are.
The Struggle
What does the default of smaller retail loans mean? It essentially means that a significant section of the population is struggling on the income front. And these loans are possibly being used to finance day-to-day consumption. Also as the RBI’s latest FSR points out: “Little more than a half of the borrowers in this segment [retail loans] have three live loans at the time of origination and more than one-third of the borrowers have availed more than three loans in the last six months."
What does this tell us? First, loans have become easier to avail and which is why credit standards are falling. Second, it’s pretty much possible that borrowers are taking newer loans to pay off older loans, something that corporates did in the 2010s. To say this with greater confidence one would need more detailed data.
In fact, this struggle on the income front is more clearly visible when we look at the overall household debt and not just retail loans. The economists, Nikhil Gupta and Tanisha Ladha, of Motilal Oswal, in a recent research note, write that household debt comprises “agricultural debt, housing loans, non-housing [retail] loans and loans taken by small businesses". The RBI estimates that the household debt as of March 2023 stood at 40.1% of the GDP. Gupta and Ladha estimate that household debt stood at 30% of the GDP as of 2018-19 and is likely to have jumped to an all-time high of 40.9% in 2023-24.
Reason to Worry?
Of the total household debt of around 41% of the GDP, 11% are housing loans given by banks and housing finance companies. The remaining debt is non-housing debt, which as the Motilal Oswal economists point out “is comparable to that in Malaysia and Taiwan, and higher than in the US, Japan, and China".
As per RBI’s FSR: “The…household debt in India is relatively low when compared to other emerging market economies, but in relation to GDP per capita, it is comparatively high." This increase in household debt, the RBI’s FSR says, “warrants close monitoring from a financial stability perspective".
Further, as Gupta and Ladha point out, household debt is expected at 52% of personal disposable income in 2023-24, against 48% in 2022-23, 40% in 2019-20 and 32% in 2012-13.
Moreover, the RBI’s FSR released in December 2023 pointed out that India’s household debt service ratio (DSR)—or the proportion of income used to repay loans—is “one of the lowest in the world". RBI calculations put it at 6.7% of the income on average. At the same time, calculations made by Gupta and Ladha put the DSR at around 11-12% of the income, which as they say “is not only much higher than its counterparts in other major economies, but has also increased gradually over the past many years".
This difference primarily comes on account of the fact that the RBI assumes the residual maturity of loans to be around 12.7 years, whereas Gupta and Ladha put it at 5.5 years, given that a significant chunk of household debt in India is non-housing debt with short-term maturities.
And this explains a few things. First, a greater proportion of household income is going towards repaying loans than in the past. And that in turn explains the slowdown in private consumption expenditure, despite the massive growth in retail lending by banks. On the whole, there is simply less money proportionally available to spend.
Second, it also explains why household financial savings—given that people have been using a higher proportion of their income to repay loans—fell to a 47-year low of 5.3% of the GDP in 2022-23. In 2023-24, it is expected to have improved to 5.7%, Gupta and Ladha estimate.
Third, a lot of bank lending is financing depreciating assets, like mobile phones and more expensive cars, or day-to-day consumption, or homes which are bought as financial assets and kept locked. As a recent news report in The Indian Express stated, quoting G. Hari Babu, national president of the National Real Estate Development Council, that more than 11 million flats have been bought for investment purposes and kept locked.
So, a good proportion of bank lending in India is not financing the purchase of assets which will generate income in the days and years to come. Of course, it’s not the fault of the banks. But that’s the way it is.
To conclude, the long shots can always look more beautiful and hide the significantly more important details.
Vivek Kaul is the author of Bad Money.
