Is rising consumer credit cause for concern?
(Source – The Hindu, International Edition – Page No. – 10)
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Topic: GS3 – Indian Economy |
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Context |
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Rising Household Debt in India
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The Financial Stability Report (FSR) 2024 highlights the increasing stock of household debt in India.
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Household debt has risen from 36.6% of GDP in June 2021 to 41% in March 2024, and further to 42.9% in June 2024.
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While India’s household debt is lower than many emerging economies, its steady increase raises concerns.
Shifting Use of Borrowed Money
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Debt is generally taken to acquire assets, but household asset holdings have declined from 110.4% of GDP in June 2021 to 108.3% in March 2024.
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This suggests that more loans are being used for consumption rather than asset creation, which could indicate economic weaknesses.
Health of Borrowing and Borrowers
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Despite rising household debt, several factors indicate that the borrowing structure remains healthy.
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The rise in overall borrowing is due to an increase in the number of borrowers, rather than increased debt per borrower.
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The proportion of sub-prime borrowers (those with lower credit ratings) has declined, while prime and super-prime borrowers now hold nearly two-thirds of total household debt.
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Super-prime borrowers, who have the highest credit quality, are borrowing more but mainly for asset creation rather than consumption.
Impact of Consumer Borrowing on Credit Growth
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Since the pandemic, borrowing by individual consumers has been a key driver of credit growth.
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In response to this surge, regulatory measures were introduced in September 2023, slowing credit growth.
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The slowdown has led to a shift towards healthier borrowers, reducing risky lending.
Rising Consumption Loans and Income Inequality
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The share of loans taken for consumption has increased over time, with lower-income households borrowing mainly for daily expenses.
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Households earning less than ₹5 lakh per year mostly take unsecured loans (e.g., credit card debt) for consumption, while wealthier households borrow for housing.
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About 50% of loans taken by sub-prime borrowers are for consumption, whereas 64% of loans for super-prime borrowers are used for asset creation.
Rising Debt Stress for Lower-Income Groups
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Personal and credit card loan defaults increased in September 2024 compared to September 2023, signaling financial stress among lower-income borrowers.
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Many borrowers who have credit card or personal loan debt also have housing or vehicle loans.
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A default on one loan leads to all loans by the borrower being classified as non-performing loans (NPLs), increasing financial risks.
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If unsecured loans face growing defaults, it could create broader economic weaknesses.
Concerns About Household Debt and Economic Growth
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The increase in unsecured consumer loans could indicate that households are facing income insecurity post-pandemic.
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Alternatively, financial innovations like credit cards may be encouraging more borrowing.
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A higher share of consumption loans means fewer assets are being created, while household debt continues to rise.
Effects on Economic Growth and Multiplier Effect
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Lower-income households contribute more to economic growth because they spend a larger share of their income.
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However, if they are burdened with debt, a part of their income goes into loan repayments rather than consumption.
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This reduces the income multiplier, meaning that economic growth generated from the same level of investment is lower.
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When poorer households face high debt, policies like income tax cuts may not have the intended positive impact on economic growth.
Conclusion
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While the shift towards prime borrowers suggests a healthier loan portfolio, rising consumer debt remains a concern.
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Policymakers must monitor unsecured loans and rising consumption debt to prevent future economic instability.
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Practice Question: Discuss the implications of rising household debt in India, focusing on its impact on economic growth, financial stability, and income inequality. (150 Words /10 marks) |
