Indian Consumer Debt

Consumer Credit – What is it exactly ?

The Indian Consumer Credit is increasing significantly. Consumer credit would be include all forms of unsecured credit like Credit cards, Personal loans and now the new age Buy Now Pay Later and EMI based sales on E Commerce Platforms.

India’s Credit Growth – Some Statistics

Card issuance has grown significantly in India at a compound annual growth rate (CAGR) of 20% in the last four years.

Credit cardholders : 29 million in March 2017

62 million in March 2021.

It has further grown by 26% and 23% respectively in 2019 and 2020.

As per a latest report by a FinTech firm, BNPL ( Buy Now Pay Later) has already captured 3% of the market share in the online e-commerce payments segment and the number could go up to 9% by 2024. BNPL is becoming a popular mode of short-term financing amongst millennials.

Wait.. But isn’t a higher spending mean higher production of goods & services?

Unfortunately NO.

The Industrial production fell to 26 month low during October 23 despite being the festive month of Diwali! Instead, despite high tariff barriers imports jumped by 25.6% over the corresponding previous year!!

Measures taken by RBI

RBI has increased the risk weight of consumer credit from 100% to 125%

A higher risk weight means that lenders need to set aside more funds as a safety net for consumer loans, which could make such credit more expensive. It restricts banks' lending capacity as they have to set aside more funds for solvency

Lower the risk weight, lower the rate of interest. This is the thumb rule.

Summing it up

A Consumption Credit Growth without a subsequent growth in Industry, Agriculture & Services on a national level

and without a Income growth on Individual level could lead to a Middle income trap and could be the cause of the next bubble.

RBI has already taken an initial corrective measure to prevent such a situation but we as consumers should also be aware of the CONs of taking undue credit unless absolutely essential. This can be done by saving up enough for our planned purchases and avoiding impulsive and frivolous buying.