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MOSL: ECOKNOWLEDGE-How sustainable is the leverage of Indian households? Household debt market is only 20-30%of its potential size

ECOKNOWLEDGE: How sustainable is the leverage of Indian households? Household debt market is only 20-30% of its potential size

 

• Between FY12 and FY15, non-food credit (NFC) of scheduled commercial banks (SCBs) grew at a CAGR of 11.9%, while personal/retail loans grew at a CAGR of 14.2%. In the subsequent three years (up to FY18), while NFC growth eased to 8.6%, personal loans grew faster at 17.8%. Consequently, the latter has become the key driving force of bank loans, and thus, almost all banks are now pushing personal loans. Personal loans now account for ~25% of NFC, as against ~18% in FY12. This trend has obviously raised doubts over the sustainability of such a high growth in personal loans, and thus, reliance of banks on them.
• In the first two parts of our III-part series, we discussed in detail the balance sheet of Indian households and how it compares with its foreign counterparts. We explained in that personal loans are only a part of the total household debt in India, which has risen to an all-time high of 48.1% of its income in FY18. In , we confirmed that notwithstanding the recent growth, India’s household debt is still much lower compared to its counterparts in other developing economies. In this final Part-III, we present two arguments debating the ongoing rise in household/personal debt that could continue for many more years to come.
• One, for the first time in the past two decades, the growth in household debt (and personal loans also) is driven by ‘credit widening’ (number of accounts), rather than ‘credit deepening’ (loan/account). Such trends are beneficial to all – the lenders, the borrowers and the economy – and make the growth sustainable.
• Two, an estimate of the potential size of the household debt in the country and the potential base of creditworthy borrowers confirm that the current market and the tax base also is only 20-30% of its potential size. It implies that there is a large room for the lenders (banks or other lending institutions) to grow its personal/household debt for at least a few years, which would also continue to support economic growth.