Financial Insights That Matter
The much-awaited boom of consumer spending has not materialized, with demand in both rural and urban areas remaining subdued. Consumer-staple companies have collectively reported less than 5% growth in volumes. Overall, consumer-goods companies are likely to report a weak third quarter. Underlying the weak consumer sentiment is a sharp rise in household debt in recent years.
According to central bank data, financial liabilities of households—or, borrowings—stood at ₹77 trillion in June 2021, a year into the covid-19 crisis and in the midst of the wrenching ‘second wave’. As of March 2024, this had risen 56% to ₹120 trillion. Even relative to GDP, this represents an increase of about 4.4 percentage points, to 41% of GDP. By June 2024, this was at 42.9% of GDP, as per the financial stability report released in December by the Reserve Bank of India (RBI).
Interest payments can squeeze household finances and affect the ability to spend. Weak consumer spending increases the onus on the government to pick up the slack on investment and spending. At first glance, at 43% of GDP, household debt is not necessarily high relative to other countries. But adjusted for per capita income, the picture changes.
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RBI in its report said India’s household debt was “comparatively high” as against that of other emerging markets. Countries such as Poland, Mexico and South Africa all have higher per capita income, but a lower level of household debt. “…coupled with an increasing trend in financial liabilities, household debt warrants close monitoring…,” RBI said.
Consumption tilt
As of March 2024, housing loans accounted for 30% of total household debt. In theory, this is not bad. While it squeezes household budgets in the short run, house buying is a form of social security in the long run. Loans taken for buying other assets, such as vehicles, accounted for another 10% of household debt. A big shift has occurred in two other categories. Loans for business purposes, including loans to self-help groups, have declined in share. But the share of loans taken to finance consumption has increased by 5 percentage points.
Motilal Oswal in a report last year pointed out that non-mortgage household debt in India was higher than that of many advanced economies (relative to GDP). If a greater level of debt is taken to finance consumption, this makes consumer spending much more sensitive to factors like interest rates, and puts inherent limits on consumption growth.
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Costlier home loans
How have interest rates on household loans (excluding those for business or agriculture) changed over the years? Since March 2019, the average interest rate on personal loans is down by about 0.21 percentage points. Interest rates on individual categories have fallen as well. The fall in some categories is substantial—for example, 6 percentage points on credit cards since 2020.
Housing loans are a big exception. In June 2022, the average interest rate on a home loan was 7.73% per annum. It crossed 9% in March 2023. About 66% of home loans in September 2024 were priced at 9% or above, compared with 21% in June 2022. This represents a substantial hit to that segment of upper-class consumers who are eligible for a home loan and are also the biggest spenders. In recent quarters, rates have tapered (8.98% in September 2024), but equated monthly instalments (EMIs) are still far higher than two years ago.
Metro decline
According to data compiled by credit bureau TransUnion CIBIL, demand for retail loans—as represented by ‘inquiries’ from potential borrowers to banks and other lenders for loans—has shown a geographical shift. As of June 2024, compared with two years earlier, the proportion of inquiries from metros declined by 4 percentage points. Semi-urban and rural geographies, which together accounted for a 50% share of inquiries in June 2024, showed a corresponding increase.
The age profile broadly remained the same during this period, with 63-65% of inquiries continuing to come from individuals aged 26-45 years. Around 18% of potential borrowers, as of June 2024, were 25 years or younger. In terms of creditworthiness, around 36% of potential borrowers were of ‘prime quality’, up 2 percentage points from a year earlier. Amid this, there is greater monitoring among both lenders and the regulator about the balance between the continued flow of loans to households and loan quality.
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