Patralekha Chatterjee | Indians’ debt crisis grows: It’s time for a reality check

“Growth in India slowed more than anticipated and is projected to remain at 6.5 per cent till 2026,” says the International Monetary Fund. The stock market is not doing well, the Indian rupee is rapidly weakening against the dollar and quality jobs remain scarce.

We can talk endlessly about our young population (median age: 28) and the “demographic dividend”. But without coming to terms with some home truths, the dreams will remain just that for the majority.

One key emerging challenge is rising household debt. More and more Indian families are borrowing money; and many are forced to default on these loans. “At 42.9 per cent of GDP (at current market prices) in June 2024, India’s household debt is relatively low compared to other EMEs (emerging market economies). However, it has increased over the past three years. Household debt is on a rising trend. The increase is driven by a growing number of borrowers rather than an increase in average indebtedness,” says the Reserve Bank of India in its latest Financial Stability Report.

“Per capita debt of individual borrowers has increased sharply for super-prime borrowers in the recent period, while it has remained stable for other risk tiers. From a debt-servicing capacity perspective, the rise in per capita debt only among highly rated borrowers and use of debt for asset creation are credit positive and financial stability enhancing,” says the RBI.

Super-prime borrowers are people with high credit scores and who typically borrow to buy property, expand their business, or invest in assets which will potentially be of higher value over time.

But there is also another group which is borrowing money to fund their everyday consumption. Though the amounts they borrow are small, they cannot be shrugged off.

People with small means are hit the hardest as they do not have the means to repay on time.

In recent months, many financial experts and the media have been pointing to the dark side of easy loans, especially the impact on small town India.

According to data from CRIF, a well-known company that specialises in credit bureau reporting and business information systems, which studied what are called “small-ticket loans” ranging between Rs 10,000 and Rs 50,000, there are worrying trends. Close to 30 per cent of Indians who took these loans in December 2023 saw their credit scores drop within six months. Equally disturbing -- more than 60 per cent continued to borrow, and the amounts they borrowed also shot up, piling debt upon debt.

This is a worrying scenario at a time when the job market is not sunny.

This week, a post on X by Nithin Kamath, CEO of online stock brokerage platform Zerodha, caught my eye. “After the pandemic, there has been a big increase in personal loans and credit card borrowings. The good side of this is the deepening of credit, but the bad side is some people seem to have borrowed too much or borrowed despite not being able to afford it. A lot of these are small-ticket loans under Rs 10,000 from fintech apps. I wonder how much of this is due to the incessant spam from these loan apps nudging people to take ‘instant pre-approved’ loans. The defaults among this segment that cannot afford to take loans are starting to increase,” said Mr Kamath.

On January 22, the daily brief by Zerodha said: “According to CRIF, while the top eight major cities in India show some signs of stress in loan repayments, the situation is much worse in smaller cities. In cities ranked 51 to 100, the percentage of overdue loans in the 31-to-180-day range (PAR 31-180) jumped from 6.8 per cent to 8.0 per cent in just one year. What is surprising is that NBFCs are stepping up their lending activities in these smaller markets, even though the risk of defaults there seems to be rising.” Non-banking financial companies (NBFC) are meant to extend financial services to underserved and unbanked segments of society.

These loan defaults did not happen overnight. They were spotted quite a while ago.

“Non-banking financial institutions borrow substantially from banks and if there is a stress in their books, it will impact the banks,” Sunil Sinha, principal economist at India Ratings and Research, told Nikkei Asia back in December 2023.

There are other worrying signs. The business papers tell us that there has been a spurt in credit card defaults and a significant rise in defaults among customers who have pledged gold to secure loans.

Gold loans are surging. But there is a flip side.

Last December, Business Standard, a leading financial newspaper, reported: “Gold loan defaults have surged significantly, creating concern among lenders. As of June 2024, gold loan non-performing assets (NPAs) have risen by 30 per cent to Rs 6,696 crores, up from Rs 5,149 crores just three months earlier, according to Reserve Bank of India data…”

The RBI had struck a cautionary note last year by asking gold loan financiers to review policies, processes and practices while offering such loans. The central bank’s directive came after it found deficiencies in loans offered by supervised entities against pledge of gold ornaments and jewellery.

Experts say gold loan defaults are part of a slowing economy, fewer opportunities to earn and stagnant or plummeting incomes. That makes it tougher to repay loans. Many Indians have taken to pledging gold to cover household expenses, and to fund education and healthcare costs, going by reports in the Indian media.

Which brings me to the need for a critical gaze. One does not have to be an economist to realise that we need to be financially literate and a lot more aware of the impact of aggressive lending in the name of financial inclusion.

India is famously resilient, and is still growing faster than most emerging markets and developing economies, but not all Indians have equal support systems. Inflation severely impacts everyone except the super-rich. Vulnerability is embedded in the lives of millions in the country. Playing the ostrich is not an option any more.