Urban Consumers Under Stress? The Sharp Decline in Consumer Durable Loans
In our previous analysis*, we examined the RBI's recent decision to reduce risk weights on bank loans to NBFCs and microfinance loans. The original tightening in November 2023 significantly impacted credit flow, with bank lending to NBFCs plummeting from 19% growth to just 6.5% - barely keeping pace with inflation. The RBI's reversal last month signals a potential revival in these segments, but a deeper examination reveals concerning trends in consumer spending patterns.
The Consumer Durables Credit Contraction
While most conversations focus on personal loans, the consumer durables segment has experienced an even more dramatic shift. This category actually contracted by approximately 3% in metro cities over the past year, with outstanding loans falling from ?24,100 crore to ?23,500 crore year-over-year in January. This contraction represents a stark reversal from historical growth patterns.
This decline primarily affects urban consumers, who typically leverage institutional financing for home appliances, furniture, and kitchen goods. Rural consumers, by contrast, have historically been reluctant to take formal credit for such purchases, instead preferring alternative financing, community lending, or retailer payment plans.
While growth rates have slowed, most India-focused consumer durables firms are still expanding. This suggests that some of these purchases are now being funded by riskier sources, such as credit cards.
To appreciate the magnitude of this reversal, consider that from March 2019 to March 2024, consumer durable loans in metro areas surged from ?6,000 crore to ?25,600 crore - a staggering 323% cumulative growth over five years, translating to a CAGR of 33.7%. This growth occurred despite the pandemic-induced disruptions, making the current contraction even more significant.
Another telling statistic: metro and urban areas account for over 75% of all consumer durable loans in the country, highlighting how this credit category is dominated by urban consumers.
The abrupt shift from 33.7% growth to a 3% contraction indicates substantial stress in urban consumer finances. Interestingly, this decline in consumer durable loan growth has not been fully reflected in the financial performance of consumer durables companies. While growth rates have slowed, most India-focused consumer durables firms are still expanding. This suggests that some of these purchases are now being funded by riskier sources, such as credit cards.
Supporting this theory is the fact that credit card transaction volumes have surged by over 30% over the last year. This shift raises concerns about sustainability—an over-reliance on credit cards could worsen financial stress and elevate default risks down the line.
Outlook and Sectoral Implications
While cooling inflation and the recently announced income tax exemptions should eventually ease pressure on this segment, investors should carefully distinguish between the following consumer durables subsectors.