Falling Savings, Rising Leverage: Is The Financial Profile Of India’s Household Sector Slowly Changing?

Over the last few years though, this attitude towards debt has changed. More people are taking on debt for consumption, leading to a boom for retail lenders. Indians are also consuming more and saving less. Part of this may be driven by lower income growth.

Have these attitudinal changes led to a shift in the financial profile of Indian retail consumers and households?

Houeshold Sector Debt As % Of GDP

There are different ways to judge the change in savings and leverage patterns. One way is to assess financial liabilities of Indian households, as defined under the National Income Accounts.

Data on financial assets and liabilities of Indian households, sourced from the RBI’s Database of Indian Economy, shows that there was a relatively sharp increase in liabilities of the household sector in the year ended March 2018.

The household sector, as defined by the Ministry of Statistics, comprises individual households, agricultural households, unincorporated enterprises and private trusts.

The data shows that bank advances to the household sector rose by Rs 4.3 lakh crore in FY18, a surge of 71.5 percent over the previous year. Credit from “other financial institutions” rose by Rs 2.4 lakh crore, almost two times the incremental lending seen in the previous year.

Consequently, change in household debt as a percentage of GDP rose to 3.9 percent in FY18 from 2.4 percent in FY17. The data as of FY19 is not yet available.

According to Radhika Pandey, consultant with the National Institute of Public Finance and Policy, the shift is reflective of the increased focus on retail lending in recent years.

“For several years, household debt as a percentage of GDP was falling indicating a positive rise in the financial assets of households. The spike in FY18 is because of households borrowing more while banks were shying away from corporate lending and veering towards retail lending. Consumption was clearly strong and driving economic growth even as private investments were muted in FY18,” said Pandey. “Considering the current macro economic environment, it’s very likely that we will see reversal in trend in FY19.”

Sanjeev Prasad, managing director and co-head of Kotak Institutional Equities, said that while there may be some increase, the outstanding debt as a proportion of GDP remains comfortable for India.

“When you looked at it on a flow basis, then as a proportion of GDP it has gone up, but I wouldn’t worry about it that much at this point in time. If I look at it on a stock basis then total household debt to GDP is at about 20 percent. I think it is manageable,” said Prasad, while adding that leverage has been supporting consumption in recent years.

However, Prasad, in a recent report, had pointed to the fact that savings in India have been falling while consumption has been rising. Beyond a point, this can’t sustain as households become uncomfortable with a lower level of savings and start to cut back on consumption, Prasad said.

Retail Debt As % Of GDP

Another way to assess the changing financial profile of Indian consumers is to look at retail loans given out by banks and non-bank lenders as a percentage of GDP.

The RBI’s sectoral credit classification clubs retail loan categories, including housing loans, auto loans, credit card loans, unsecured personal loans, among others, as personal loans. This, in industry parlance, is broadly termed as retail debt.

Incremental retail advances by banks and non-banks rose by 61.6 percent year-on-year to Rs 4.3 lakh crore in FY18, according to data compiled from RBI’s Trends and Progress in Banking report released in December 2018 and December 2017.

As a percentage of the GDP, incremental retail credit constituted 2.5 percent in FY18 as against 1.7 percent in FY17 in current terms. In outstanding terms, retail credit by banks and non-banks constituted 13.4 percent of the GDP as on March 2018, shows the data.

A senior banking sector consultant, speaking on condition of anonymity, told BloombergQuint that while aggregate retail debt may not be concerning, debt levels in certain segments such as urban and metro consumers need to be watched as most lenders have focused lending to these such customers.

According to an Edelweiss report dated May 30, though consumer leverage is rising, it remains within comfortable levels.

Though lead indicators aren’t showing any red flags, given current trends, financiers would closely watch out for leverage and delinquency trends across retail segments, said Edelweiss.

Edelweiss noted that high-risk profile customers (with CIBIL score below 650) now account for 20 to 25 percent of all customers in the personal loan, credit card and consumer durable segments, according to data by credit bureau TransUnion CIBIL. “Slowing growth and rising risk profile will keep financiers watchful of leverage and delinquency trends,” Edelweiss said.

Individual Debt As A % Of GDP

Credit bureau TransUnion CIBIL also puts out data for individual debt, which includes retail loans but also accounts for business loans taken by individuals.

This data, too, suggests that individual debt as a percentage of GDP is on the rise.

According to CIBIL data, individual debt as a percentage of GDP rose to 27 percent as of March 2019 compared with 19 percent four years ago. “Business lending to individuals has been the biggest contributor to the growth in the segment,” the credit bureau said in a report in June.

“The comparatively higher rate of individual lending has translated into a major shift in the composition of the lending industry in favor of individuals,” TransUnion CIBIL noted.

‘Concerning But Not A Collapase’

Sanford C. Bernstein, which has been conducting a proprietary survey to track consumer leverage for the last five quarters, said that the current consumer credit cycle is in the sixth year. “Assessing the capacity of consumers to service debt becomes crucial as we advance into this cycle,” authors Gautam Chhugani and Gaurav Jangale wrote in a report dated July 31.

The Bernstein survey of 500 consumers across 21 cities found that, on average, 25 percent of disposable income is being used to service debt, 45 percent is being used for household expenses and the remaining 30 percent for savings. The proportion of income being used for debt servicing has increased marginally from 23 percent a year ago, the survey found.

“A further analysis of the debt service capacity to quantify the vulnerable borrower segment shows that the proportion of borrowers spending 40-60 percent of their disposable income to service debt is 13 percent and those spending more than 60 percent is 6 percent of the total respondents,” the report added.