Is Rising Consumer Credit Cause for Concern?

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Overview of Rising Consumer Credit

Household Debt Increase: Household debt in India has risen from 36.6% of GDP in June 2021 to 41% in March 2024, reaching 42.9% by June 2024, per the FSR 2024.
Comparison to Emerging Markets: Despite this increase, India’s household debt-to-GDP ratio remains lower than many emerging market economies.
Shift in Borrowing Purpose: A notable portion of this debt is being used for consumption rather than asset creation, signaling potential macroeconomic weaknesses.

Relevance : GS 3(Economy)

Increase in Borrowers, Not Indebtedness: The RBI notes that the rise in household debt stems from more individuals borrowing, not an increase in average debt per borrower.
Shift to Healthier Borrowers: The proportion of sub-prime borrowers has decreased, with nearly two-thirds of debt held by prime and super-prime borrowers (those with high credit quality).
Super-Prime Borrowing Trends: Rising per-capita debt is primarily among super-prime borrowers, who tend to use loans for asset creation (e.g., housing, vehicles).
Post-Pandemic Credit Growth: Consumer borrowing has driven credit growth since the pandemic, but RBI measures introduced in 2023 have slowed this growth, shifting it toward healthier borrowers.
Reduction in Sub-Prime Borrowing: Sub-prime borrowing has relatively declined, suggesting a healthier credit market focused on asset-building by creditworthy individuals.

Rising Consumption Loans: The share of loans for consumption (e.g., personal loans, credit card debt) has increased, rather than for productive purposes like housing or education.
Decline in Household Assets: Household assets dropped from 110.4% of GDP in June 2021 to 108.3% in March 2024, indicating borrowing is not translating into asset accumulation.
Income Disparity in Borrowing: While 64% of super-prime borrowers’ loans are for assets, nearly 50% of sub-prime borrowers’ loans are for consumption, disproportionately affecting lower-income households (earning less than ₹5 lakh annually).
Unsecured Loan Stress: Personal loans and credit card debt delinquencies rose in September 2024 compared to September 2023, reflecting financial strain among lower-income borrowers.
Cascading Risk: About 50% of borrowers with unsecured loans (e.g., credit card debt) also have housing or vehicle loans; defaults in one category could classify all loans as non-performing assets (NPAs), amplifying risk to the financial system.

Income Insecurity: Post-pandemic income challenges may be pushing lower-income households to rely on credit cards and unsecured loans to bridge consumption gaps, suggesting a weak macroeconomy.
Financial Innovation: The proliferation of credit instruments (e.g., credit cards) may be enabling easier access to debt, potentially exposing lower-income households to financial fragility.
Unanswered Questions: The text raises whether this trend reflects structural economic weakness or overreach by financial institutions, with implications for stability.

Impact on the Multiplier Effect: Lower-income households typically have a higher income multiplier (more income spent on consumption), but rising debt reduces disposable income as funds go toward debt servicing, lowering consumption and economic growth.
Reduced Growth Potential: An economy with high household debt, especially among poorer households, may experience weaker growth for the same level of investment due to this diminished multiplier.
Policy Effectiveness: Macroeconomic policies (e.g., tax cuts) may have limited impact if indebted households prioritize debt repayment over spending.

Yes, for Lower-Income Households:
- Rising unsecured debt and delinquencies among sub-prime and lower-income borrowers signal financial stress.
- Consumption-focused borrowing, rather than asset creation, limits wealth-building and increases vulnerability.
- Potential for defaults to spill over into higher-value loans (e.g., housing) poses systemic risks.
No, in the Broader Context (RBI’s View):
- The shift toward prime and super-prime borrowers suggests a healthier credit profile overall.
- Increased borrowing reflects broader participation rather than excessive leverage per borrower.
- RBI interventions have moderated credit growth and improved borrower quality since 2023.
Mixed Outlook:
- While the credit market appears stable for wealthier, prime borrowers, the growing reliance on consumption loans among lower-income groups is a red flag.
- The decline in household assets alongside rising debt undermines long-term economic resilience.