How India’s middle-class debt crisis is threatening growth
A rise in unsecured credit among a consumer group that symbolises the country’s investment potential is hurting its economic ambitions
Chris Kay in Mumbai and Krishn Kaushik in New Delhi
Shoppers at a mall in New Delhi. A surge in retail lending has led to a sharp rise in household debt © Anindito Mukherjee/BloombergAnurag likes to claim he has become numb to the dozens of calls and multiple visits he receives daily from debt collectors to his home in an upwardly middle-class suburb of Mumbai.
But that harassment reached a new pinnacle about a month ago when he says an agent employed by an Indian bank phoned his wife’s boss to complain about his arrears, putting acute pressure on his family and subjecting them to wider shame and ostracism.
“This financial struggle has caused a lot of depression that I won’t discuss with anybody,” says Anurag, who is in his 50s and asked for his identity to be concealed.
Since losing his travel agency job late last year, he has racked up $13,000 in debt and depleted his savings.
“You question your own personal worth,” he says.
“You wonder if your existence is meaningless.
You let people down, you sometimes contemplate the extreme — you don’t want to continue living.”
Anurag’s story of mounting debt is becoming more commonplace among India’s middle-class, a supposedly growing segment of society that bankers and consultants regularly highlight to sell the investment potential of the world’s most populous nation.
Grand bets have been made by multinationals, including Amazon, Samsung and Walmart, that as India becomes wealthier, the more they will consume.
“Everybody wants a laptop, everybody wants a TV, everybody wants a smartphone,” says Anil Agarwal, the billionaire chair of Indian natural resources and energy conglomerate Vedanta.
“They want a car, they want a scooter and their children to study in a good school — demand is tremendous.”
That aspiration has spurred a surge in retail lending, which grew more than 30 per cent annually in 2023.
Some of that credit was used to keep up with the Joneses and flaunt a showy lifestyle across social media.
Much was also taken just to finance day-to-day expenses as living costs soared following the coronavirus pandemic.
But a day of reckoning is fast approaching.
Household debt has grown to about 43 per cent of GDP in June, from just over 35 per cent in March 2020, according to the latest RBI data.
A crackdown in 2023 by the Reserve Bank of India, which warned retail lending was getting out of hand, has hit financial sector earnings just as many Indians are struggling to repay their loans.
More broadly, the unsecured credit crisis threatens to puncture India’s narrative that it is a rising power driven by an expanding moneyed cohort.
Prime Minister Narendra Modi wants the country to escape the middle-income trap, a period of stagnation that follows high growth, and reach developed status by 2047 — a century after independence from Britain.
That stress is “fuelling the kind of inequality that we are seeing”, says Kunal Kundu, India economist at Société Générale.
“While India still remains the fastest growing large economy, what people do not realise is there is only a small part that’s driving growth.”
Spending among India’s fragile urban middle-class, a fluid group whose definition remains open to interpretation but is largely estimated in the tens of millions, has dropped off and is helping feed into a wider economic downturn.
India’s government estimates GDP growth will fall back to 6.5 per cent in the financial year that ended in March, compared with 9.2 per cent the previous year — well below the 8 per cent level estimated that India needs to reach its development ambitions.
Its economy, while less export-dependent than many of its Asian peers, will still be roiled by US President Donald Trump’s global trade war, analysts say.
Consumption is falling at a time when as much as a tenth of all middle-income, wage earning Indians are caught in a debt trap, according to research by Marcellus Investment Managers.
The Mumbai fund manager has flagged that India’s household savings as a percentage of GDP are at their lowest level in 50 years, while incomes have stagnated over the past decade.
Meanwhile, food prices have nearly doubled.
“The accumulation of household debt has been frenetic in the last five years,” says Saurabh Mukherjea, chief investment officer at Marcellus.
Even when he was employed, Anurag had taken out multiple loans and credit cards to keep afloat, but was able to meet his repayments thanks to a combined annual income with his wife of about $23,000.
But his position became increasingly precarious.
His last two jobs saw him take lower salaries while expenses such as school fees climbed, pushing him further into debt.
“I don’t think I was really living lavishly,” he recalls.
“We were trying to feel comfortable at home, occasionally dining out and travelling before I lost my job.”
Ritesh Srivastava, chief executive of Freed, an Indian credit resolution company that helped Anurag get a handle on his debt, says he has seen a 15 per cent annual jump in clients who, on average, typically stack half-a-dozen loans totalling $6,000 while having a monthly income of between $460 and $580.
“Robbing Peter to pay Paul,” adds Srivastava.
After an electoral drubbing last year, seen as a protest against a lack of well-paid jobs, Modi’s government has, perhaps belatedly, recognised that deep distress.
In February, finance minister Nirmala Sitharaman proclaimed “the middle class provides strength for India’s growth” as she announced sweeping tax breaks to “leave more money in their hands”.
Those measures were a tacit recognition of the squeeze on India’s salaried class, even though household debt levels still remain lower than in developed nations.
However, some economists argue the credit build-up has disproportionately hit the middle and lower tiers of India’s highly stratified wealth pyramid, where a powerful billionaire “Bollygarch” class perches on top of a country where per capita GDP is below $3,000.
“We haven’t done enough to raise the levels of prosperity in a more equitable sense,” says Dhiraj Nim, India economist at ANZ Group.
“There is a divide, which has widened through the last few years, that is a huge obstacle to realising the 2047 dreams.”
A decade ago, India’s reforming central bank governor Raghuram Rajan denounced the deeply embedded crony capitalism that led to the banking sector being stuffed with delinquent loans, calling on lenders to start “rooting out the bad apples”.
He forced banks to conduct an asset quality review and large-scale provisioning against souring corporate debt by holding back capital.
But the clean-up had unintended consequences.
Fearful of regulatory action, Indian banks pared back industry financing, which has only grown about 4 per cent annually since 2014, compared with more than 20 per cent the previous decade.
Instead, lenders shifted to extending credit cards and personal loans — many of which came with glitzy endorsements from Bollywood stars such as Shah Rukh Khan and Ranbir Kapoor — to millions of Indians at juicier rates than corporate borrowers.
Easy credit was available at the touch of a button, thanks to cheap data, loan apps and “buy now, pay later” EMIs — equated monthly instalments — which allowed for purchases of good like TVs and washing machines, once out of reach.
It also heralded a major departure from conservative Indian attitudes towards family finances, when flashy spending was traditionally frowned upon.
A recent survey by PwC and Perfios shows tech-savvy Indians now spend 33 per cent of their incomes on repaying EMIs.
Credit card spending has also shot up 28 per cent annually since 2013, with unsecured lending hyperdriven following the pandemic.
“That urge to spend away just after the reopening happened, coupled with the fact that bank credit is so much more accessible thanks to technology,” says Nim at ANZ.
“All of that led to this personal loan boom, alongside the fact that households have been financialising their savings . . . very rapidly at a much lower level of per capita income and levels of financial literacy and education than experienced in other economies,” he adds.
“That is a risky aspect which everybody is now waking up to.”
Pedestrians pass stores in Mumbai. Credit card spending in India has shot up 28% annually since 2013, with unsecured lending hyperdriven following the Covid pandemic © Abeer Khan/BloombergAs borrowing rocketed at the end of 2023, the RBI came down hard on what the then governor Shaktikanta Das called “exuberance”.
It hiked its risk weight, the minimum amount of capital the bank must hold in relation to the asset, on personal loans from 100 per cent to 125 per cent.
A dramatic plunge in retail lending followed, now down by more than half its peak.
“People who had high levels of indebtedness have seen withdrawal of credit lines to them,” says Amitabh Chaudhry, chief executive of Axis Bank, one of India’s largest private banks.
“People who were on the edge have been pushed over the edge, because as the market started seeing higher losses banks started underwriting differently.”
By then, many retail investors had also used unsecured loans to invest in India’s equity market, egged on as stocks soared on the back of a flood of domestic money.
Many younger Indians also gambled in high-risk derivatives.
This was followed by some Indian corporates reporting weaker earnings last year as demand fell off and foreign investors rushed to the exit.
The Nifty 100 index, which tracks India’s top stocks, has dropped 14 per cent after hitting record levels in September.
Late payments on personal loans by more than 90 days have climbed to 5.2 per cent as of September, up from 2 per cent in 2019, according to Nomura.
Much of this unsecured lending was enabled by India’s non-deposit-taking shadow banks and microfinance industry, which expanded 37 per cent annually in the financial year ending in March 2023.
Indian rating agency CareEdge expects that growth rate to have plunged to 4 per cent this year.
In particular, India’s microfinance lenders, which typically grant collateral-free loans to borrowers with annual incomes of up to about $3,400, have registered a surge in delinquencies, those who have not paid in the last 90 days, to 13 per cent.
This is up from 7.9 per cent two years ago after industry rates were deregulated in 2022, according to S&P Global Ratings.
“It will take some time for the system to flush this out,” says Chaudhary at Axis Bank, which in the December quarter doubled its cover for potential bad loans to about $250mn.
“We are concerned that some of these credit slippages could potentially go to the secure side.”
However, Gopal Jain, managing partner at the Mumbai-based private equity firm Gaja Capital, which has invested in financial services, dismissed such fears.
Unsecured lending is “still small”, amounting to less than 10 per cent of banking system credit and “a social necessity in India” given how few Indians have collateral, he says.
“The genie is out of the bottle . . . corrections have been made and the trend will resume on a healthier footing with lessons learned,” Jain argues.
“India’s asset-light customers are hungry for loans, but in the next cycle we have to do a better job of containing credit costs.”
The lending industry’s darker practices have yet to be brought under control. Ranganathan Iyer, a 59-year-old former salesman, lost his job during the pandemic and became overwhelmed by debts exceeding $70,000 — roughly double his household’s annual income of about $35,000.
When the banks kept offering “top-up” facilities, he and his wife accepted — 20 in total from 11 institutions.
Then burly debt collectors started showing up at his apartment in Mumbai, causing a “ruckus” in front of his neighbours.
Taking advantage of India’s lax data protection laws to collect sensitive information, lenders seek out their customer’s personal contacts to cast a wide net of intimidation to pressure them to pay up.
“They call families and friends, making it even tougher for the person to take money from anyone,” he says.
The rampant and often illegal intimidation by debt collectors has now drawn political attention.
This year, Karnataka, a southern state governed by India’s opposition Congress party, introduced legislation to curb “inhumane” and coercive loan recovery practices after a spate of suicides in farming communities and villages.
“These are vulnerable sections of the society,” Karnataka’s revenue minister Krishna Byre Gowda says.
“Their ability to service the debt is not there, so taking advantage of this situation, a lot of microfinance institutions are lending way beyond the prescribed capacity — this is leading to unsustainable debt.”
A rickshaw stands in front of a billboard advertising loans in Mumbai. Late payments on personal loans by more than 90 days have climbed to 5.2% as of September, up from 2% in 2019 © Abeer Khan/BloombergByre Gowda criticises Modi’s administration for “keeping very quiet on this — this is a symptom of distress at the lower level, which the central government probably doesn’t want to acknowledge”.
Anirban Bhattacharya, who heads up the national finance team at the New Delhi-based Centre for Financial Accountability, which is conducting a study on debt distress in rural India, says “there’s no recognition that there is a crisis”.
India’s finance ministry did not respond to a request for comment.
In some cases the RBI has stepped in, imposing in October 2024 a “cease and desist” order on four non-banking finance companies and microfinance lenders for alleged predatory pricing, insufficient transparency in disclosures or failing to properly evaluate household income and fixed monthly liabilities.
However, RBI governor Sanjay Malhotra, who took office in December, recently said the central bank’s measures had worked as intended.
In late February, the RBI partly rolled back some of the weight risk measures.
Kundu at SocGen believes the pressures on lower-income families have yet to ease.
The number of people pawning their gold and jewellery jumped 77 per cent on an annual basis in January, presumably after other forms of credit were cut off.
“The lower half of the pyramid is really struggling,” he says.
“It’s a signal of household stress.”
Meanwhile, a nascent debt-management industry has emerged as a lifeline for individuals like Iyer, and is growing in tandem with India’s hunger for credit.
But representatives warn that there is little being done at policy level to keep rising debts in check.
“This is a time bomb ticking away,” says Harish Parmar, founder of SingleDebt, a loan settlement agency that has helped shield Iyer from aggressive debt collectors after taking up negotiations with his banks.
“There seems to be no active solution on the table.”
Despite receiving professional help to manage his debt, Iyer, who continues to struggle in his search for full-time employment, is feeling the emotional toll.
“Whatever little respect I had, they ruined that,” Iyer says of his reputation.
“Once you get trapped in that loop, then you can’t escape.”
Additional reporting by Malcolm Moore in London
0 comments:
Publicar un comentario