If we go by the official data, traditionally Indians are very careful about credit and the household assets grew much faster than household liabilities as shown in the graph based in RBI data.
Note: The aggregate data may not show the non-homogeneity due to income inequality and extent of financial literacy. A survey conducted by the National Bank for Agriculture and Rural Development (Nabard) found that level of indebtedness in rural households is significantly high. This is correlated with lack of financial literacy and lack of access to the formal financial system.
But, the credit scenario is changing rapidly in India. With growth in Indian per capita income at 8.6% – the number of credit card accounts grew by 28.3% and the outstanding credit balance by 43% according to Transunion Cibil quarterly report. The credit card numbers and outstanding balance are at all time high. The unsecured personal loan accounts grew by 26.9% and the outstanding balance by whopping 49.1%. It indicated that many Indians are financial lifestyle with credit and that is a worrisome trend.
Changes in Credit Scenario in India
1. Pressure on the Corporate Lending
In recent years, as more and more Non Performing Assets started pulling the balance sheets of Indian lenders, the lenders started pushing retail credit. As per RBI data, personal loans represent 25.34% of gross bank credits now increasing steadily from 21.83% growing at the rate of 16.7% just two years ago annually.
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2. Technological Progress
Widespread availability of information about credit and ease of online application making it easy for people to apply for loan. Getting a unsecured loan is easier than ever before. For lenders also digital channels are cheaper and faster. Today there are many apps you can apply for loans in minutes with eKYC, eSign and other technologies.
3. New Players
A few decades ago, banks had a monopoly on Indian credit industry. In recent years we have seen drastic change in that. Non Banking, Financial Corporatation are taking hold of the industry quickly. As per a 2016 PwC- ASSOCHAM report, NBFCs represented 13% of total credit market in 2015 and expected to reach around 20% in the year 2020. This report expected a growth of 19%-22% CAGR in retail credit. A new fast growing sector is P2P lending platforms.
Easy Credit does not Mean Cheap Credit
As per a CRISIL report, between 2015 to 2018 the CAGR of unsecured credit by banks grew by 27%, which is four times the growth in total bank credit. The yields on such loan is much more attractive than secured loans. That means a borrowers pays a much higher interest for a personal or credit card loan than on a automobile loan. That is why lenders have all the incentive to push such loans.
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Easy Credit does not Mean Right Credit
Now, let us consider the impact of current trends on personal finance.
An easy credit means borrowing for a financial goal rather than saving and most people are not good at waiting. As credit becomes easier, people will start first borrowing and fulfilling a financial dream and then pay it back. There are two important questions here –
- Are you borrowing for something which will generate income or reduce your expenses somehow ?
- Is your return from the asset built using credit enough to justify the cost of unsecured loan you are planning to take?
If you are going to use the credit for lifestyle expenses, you are making a financial mistake. You all have desires which may not always be justified or handled rationally. A small loan may not affect you, but if it becomes a habit, then it can ruin your financial situation at and suck you into a debt trap. A major problem with indebtedness is that it decreases your risk tolerance significantly and with that the kind of return you can get from your investments.
Sam Ghosh, He is the founder of Wisejay Private Limited and a SEBI Registered Investment Advisor. He has an MBA in Finance from University of Calgary, Canada and completed all three levels of the CFA program offered by the CFA Institute, USA.