Why India must mind the consumer credit trap
Pros and cons Between March 2014 and March this year, the share of non-agricultural bank loans to industry, services and trade declined by almost 20 percentage points to just under 50%. Over this period, the share of consumer loans rose from 18% to 32%, according to RBI data.
A recent review of retail credit in the RBI’s monthly bulletin pointed out, “retail segment played a major role in the recovery of overall credit growth in the post-covid period." What are the implications of such a shift for both consumers and the banking sector? For years, retail credit in India, especially home loans, was seen as a ‘safe’ bet by banks—for the vast majority of borrowers, a home loan was the biggest investment they would ever make. Even if economic conditions turned bad, and people lost their jobs, they would cut back personal spending sharply rather than default on their home loans.
So far, the data has borne out the supposed ‘low-risk’ nature of such loans—gross NPAs for all consumer loans were 1.4% of total loans, as of March. Over the next couple of years, however, this claim is likely to be tested—the 2008 global crisis was, after all, triggered by over-indebtedness of households in real estate.
As the RBI review pointed out: “The better asset quality in the retail segment…appears to be contributing to banks’ increased focus on retail credit. However, this is not a risk-free segment and not a panacea for asset quality concerns in non-retail loans." On the plus side, the review argues that the boom in retail credit is cyclical, and is likely to reverse as corporate and industrial capital expenditure revives.
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