Household indebtedness in India - a new chapter

Indian financial system seems to be much relieved after the great NPA clearance exercise undertaken by Indian banks. RBI has reported that Gross NPA stands at 7-year low at 5% in September 2022. Moreover, Net NPA is at 10-year low of 1.3% [Ref-: https://www.livemint.com/news/india/banks-gross-npa-drops-to-7-year-low-at-5-net-npa-at-a-decade-low-rbi-s-fsr-11672318983978.html].

The central banker has also reported that credit growth stands at 17.4% as on 16th December, 2022. The aggregate deposit growth stands at 9.4% on the same date. A reason to breathe a sigh of relief! I also had the same thought. Then I tried to correlate a few things. What is about GDP growth? I assume that people / business are taking more loans since they feel confident about future. The GDP growth rate projected by NSSO [GOI agency] for FY 2022-23 is 7%. It is healthy but a clear dip from 8.7% seen a year before. The estimates by agencies like IMF & World bank are lower than GOI’s for FY 2022-23. They are 6.8% & 6.9% respectively [Ref-: https://timesofindia.indiatimes.com/business/india-business/indias-gdp-estimated-to-grow-at-7-in-fy23-says-government/articleshow/96795545.cms]

Even if, I assume that India needs to grow ~8%-9% to develop the economic condition of its people. We can still be happy with the GDP growth rate since external factors like Ukraine war, Covid-19 etc. are hampering our economy.?However, I wanted to know who are driving the ’17.4% credit growth’ for the banks.

This credit growth is driven mostly by retail loans. The retail loan increased from 35 million in March 2020 to 40 million over one year, a 12.5 per cent increase, and by a huge 50 per cent margin to 60 million by end of March 2022, as compared to the year-ago period [Ref-: https://www.outlookindia.com/business/personal-retail-loans-surge-by-50-in-2022-says-andromeda-equifax-report-news-219098]. The size of personal loan also grew rapidly, from Rs.6 lakh crore in March 2021 to Rs.8 lakh crore, a year later. This is a huge increase of 33.33% over a year! Now, everybody seems to be OK with this loan growth. Market & government cheered it because they think it is going to boost consumption & as a result Indian economy will grow.

I am OK with consumption-driven GDP growth. However, I want to check how this increased ‘indebtedness’ will impact the overall ‘credit risk’ scenario for the economy. Now as a man on the street, I would like to check how this ‘personal / retail loan’ will be paid back. My assumptions are the following.

·???????People need to have job so that they can pay the EMI of their loan in time. So, one needs to check if there is a growth in the ‘employment rate’. This will ensure that people will have money to pay the loan.

·???????Another thing is the ‘average increment in salary’. That will also ensure that in an ‘increasing interest rate’ scenario individual borrowers could pay the extra interest from their ‘increased salary’. [RBI has increased Repo rate to 6.5% as per The Economic Times on 9th February, 2023 – highest in ~5 years. This will trigger / already trigger an interest rate increase by all banks].

·???????Growth in ‘household savings’ is also a key to check overall financial well-being of the household & economy. The worrying reason is Foreign Institutional Investors [FII] are leaving Indian market in drove [In Indian currency terms, the 2022 FII sell-off is worth Rs1.2 lakh crore, shows NSDL data, Ref-: https://economictimes.indiatimes.com/markets/stocks/news/fii-tracker-68-million-a-day-2022-exodus-worst-in-india-history/articleshow/96559775.cms]. DIIs are saving the day for Indian equity market. In 2022, DIIs had bought Rs2.76 trillion worth of Indian equities [Ref-: https://www.moneycontrol.com/news/business/earnings/will-domestic-institutions-continue-to-buy-equities-in-2023-9798181.html]. These DIIs [banks, Insurers, Mutual Funds etc.] are fueled by household savings. The savings can also be used in future to pay the loan in case of any problem with salary.

Now what I find to support above-mentioned 3 points are given below-:

·???????Unemployment actually increased to 8.3% in December 2022 from 6.83% in July 2022, however, in January 2023 it came down to 7.14% [Ref-: https://unemploymentinindia.cmie.com/]. However, this can be misleading since, India’s workforce participation rate is very low at 37.1% in December 2022 [Ref-: https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=20230102130713&msec=290#:~:text=The%20employment%20rate%20is%20the,37.1%20per%20cent%20in%20December].?This is the lowest among similarly placed G20 members, since countries like Mexico, Brazil & South Africa have workforce participation rate of 59.69%, 62.7% & 58.3% respectively in December 2022 [Ref-: https://tradingeconomics.com/country-list/labor-force-participation-rate]. So, the overall Indian population seems to be out-of-job market for various reasons & those are in the job market are also not getting employment! So it is a red flag.

·???????India Inc. is likely to see an average salary increment of 9.8% in 2023 & this is higher than 9.4% hike seen in 2022[Ref-: https://timesofindia.indiatimes.com/business/india-business/india-inc-may-dole-out-9-8-salary-hike-in-2023-survey/articleshow/97024755.cms]. In an economy where inflation is ~6.5%, this gives people some room for breather if they actually get this much hike […assuming an average crude oil price (Indian basket) of USD 95 per barrel, inflation is projected at 6.5 per cent in 2022-23, with Q4 at 5.7 per cent as reported by NDTV]. This is a green flag.

·???????India’s gross domestic savings rate may have fallen to a 19-year low of 26.2% of the gross domestic product (GDP) in the first half of the fiscal 2022-23, according to a report by Motilal Oswal Financial Services [Ref-: https://www.financialexpress.com/economy/savings-rate-at-19-year-low-in-h1fy23/2908019/]. This is clearly a red flag. I can say increased consumption & above acceptable inflation are sucking the income of an average Indian household.

So, I can safely conclude that there is a risk that this huge growth in retail loan can boomerang in future. Since households are not saving enough & workforce participation remains very low compared to other developing countries – I don’t see much comfort for policymakers. Moreover, unemployment rate although improved in January 2023 still remains above the July 2022 figure. The only respite is people can expect a better salary hike in 2023 compared to 2022. The reasons to worry about ‘retail loan default’ defeats the reason for not to worry by 2:1. The loan growth of 17.4% vs. deposit growth of 9.4% indicates that people are not saving as much as they should. I hope that robust risk analysis framework is being used by the lenders like banks & NBFCs. In the following article, I would explore the overall condition of risk analysis framework in India.