A Debt Trap: Should We Worry About Rising Personal Loans in India?


Indians relied on borrowed money as their income dried up during the Covid-19 pandemic:

  • Outstanding credit card debt defies the gravitational pull of persistent inflation and slower growth
  • Credit cards are India’s staggering Rs. 1,529 billion. 35 trillion personal loans
  • Lending against gold jewelry was at a higher level at the height of the pandemic

People are spending more than they take home, forcing families to dip into their savings or borrow money to make up the difference.

why is it important

Pandemic-induced financial strains and high inflation are pushing households to take on more debt, especially loans tied to durable consumer credit card payments and fixed deposit loans.

In numbers

The data suggests that by borrowing more, consumers kept retail spending at higher levels as inflation rose. The Reserve Bank of India reported that personal debt soared to Rs. 35.2 trillion at the end of June this year. At the same time, interest rates began to rise from historic lows and retail price inflation jumped to an eight-year high of 7.4%.

“June 2022 was the sixth consecutive month that headline CPI inflation remained at or above the upper tolerance level of 6%. Looking ahead, the path of inflation continues to be heavily dependent on the changing geopolitical developments, international commodity market dynamics, global financial market developments and the spatial and temporal distribution of the southwest monsoon,” the RBI Governor said last week.

The total outstanding amount of personal loans has jumped by nearly Rs 10 trillion over the past two years.

In June 2022, personal credit grew at an annual rate of 18%, double percentage points (nine%) from July 2020 before the peak of the COVID-19 pandemic.

Consumer debt levels rose across all categories, but mortgage, vehicle and credit card debt were the main driver of the overall increase. Home loans have soared by almost Rs. 4 trillion since July 2020, outstanding car loans have increased by almost Rs. 2 trillion, credit card debt has jumped by Rs. 515 billion, and the debt classified as “other personal loan” in the report rose by Rs. 2 trillion. However, loans against stocks and bonds remained stable at around Rs 3 billion only.

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These facts raise two questions: what caused this mountain of debt to arise and what are the consequences? First, since real wages for most of the working population have stagnated or fallen, especially since the start of the pandemic, people have responded in part by borrowing to maintain or increase their standard of living.

Is increasing personal debt good or bad?

Ideally, household savings and spending drive the economy. Spending creates demand and saving promotes investment. But in times of financial stress, consumption matters more than savings. A recession hits savings, while consumption deteriorates after exhausting all available financial resources, including borrowing.

The current trend is not alarming, but relying on personal demand based on credit for a certain period can create a big challenge for the economy. Historically low interest rates or no-fee EMIs and intense competition among lenders have pushed millions of Indians to borrow to buy homes or durable consumer goods.

The big picture

Demand for personal loans surged in the first quarter of fiscal 2023. Outstanding personal loans increased in April. After a slight moderation in May, it jumped again in June. Maximum growth was reported in consumer durables and gold loans, followed by vehicles and credit cards.

Growing personal debt is not only rising in India. In the United States, household debt topped $16 trillion for the first time in the second quarter of 2022 to cope with ongoing record inflation. Credit card user balances also rose by $46 billion over the same period, a 13% spike with the biggest year-over-year jump in 20 years, the Reserve reported. federal government in New York last week.

The Covid-19 pandemic has led to a spike in household debt relative to the GDP rate. According to research by the State Bank of India, household debt rose sharply to 37.3% in fiscal 2021 from 32.5% in 2020 (BIS estimates are 37.7% in December 2020). However, the bank hopes that household debt as a percentage of GDP “decreased to 34% in Q1FY22 with the proportional increase in GDP in Q1, although it increased in absolute terms.”

According to the Bank for International Settlements paper, in the short term, rising household debt is fueling consumption and GDP growth. In the long term, if the share of household debt in GDP exceeds 60%, it can harm the economy. However, the situation in India is not alarming since the share of household debt in GDP is below this level.

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