Indian households are racking up debt at an unprecedented pace

• Loans extended by banks to Indian households surged by 72% to ₹4.3 trillion in 2017-2018, as per RBI data, reversing a four year decline.
  
• This was largely due to the increasing rate of credit card adoption and the increasing focus of banks on consumer lending amid sluggish corporate credit growth.
  
• India’s ratio of household debt to GDP stood at a little under 16% last year, compared to around 50% for China.
  

Between 2012-13 and 2016-17, Indian households reduced their borrowing from banks on an annual basis, while loans from non-banking financial institutions increased regularly. However, in the year ended March 2018, the loans extended to Indian households from banking institutions surged by 72% to ₹4.3 trillion, as per data from the Reserve Bank of India (RBI), reversing a four year decline.

This was largely due to a number of factors. Firstly, with the availability of credit data and scoring, banks have increased their focus on consumer lending, especially credit cards. Secondly, consumers themselves have become less averse to taking on debt to finance purchases of electronic appliances, cars and houses.

Finally, as growth has lagged in the wake of demonetisation and the implementation of the GST regime, Indian corporates have been wary of taking on more debt. Conversely, India’s bad loan crisis has made banks wary of lending to corporates. Hence, they have relied on retail lending to supplement credit growth.

As a result, Indian households are the most leveraged they’ve been in a while. Total outstanding debts of households rose by 80% to ₹6.7 trillion in 2017-18. This amounts to 4% of their disposable income - a seven year high, according to the RBI’s latest annual report.

While the buildup in loans has been quicker than expected , it might be premature to sound the alarm right now. India stills stands out amongst its peers in terms of thriftiness. The country’s ratio of household debt to GDP stood at a little under 16% last year, compared to nearly 40% for most emerging markets, which have all experienced a surge in private debt since the financial crisis of 2008. For example, China’s household debt-to-GDP ratio is estimated to have reached the 50% mark this year.

Also, credit expansion is an important component of economic growth. As corporate lending has been sluggish in the last few years, Indian households have chipped in. However, given the recent rate hikes by the RBI, loans will become more expensive, which will depress credit demand from households. This could, however, be countered on a cumulative basis by the increasing penetration of credit cards.