With WPI inflation consistently undershooting projections, the real value of nominal debt or credit card outstanding has become higher than expected. This may contribute to the building up of financial risks and make it difficult for households to manage their balance sheets says a report from SBI
The current increment in bank lending has mostly been to the personal loan segment. Moreover, within the personal loans, it is the credit card loan segment that is rising rapidly, indicating a rise in consumer indebtedness. However, household debt as measured by credit outstanding per credit card in India has been rising even in real terms (after being adjusted for wholesale price index (WPI) inflation, says a report from State Bank of India (SBI) Ecowrap.
It said, "Personal loans share is currently rising in the total loan portfolio which leads one to wonder if this increase suggests a movement towards a similar glaring situation as had happened prior to 2008 global crisis when share of personal loans increased in total ASCB loans or does it portend a potentially brighter economic outlook ahead."
The divergence between the deposit and credit growth has increased recently. While all scheduled commercial banks (ASCB) deposit growth has hit 53-year low of 9.9% in FY16 as on 18 March 2016, the credit off take has shown some improvement (at 11.3% as on 18 March 16). Household debt as measured by credit outstanding per credit card in India has been rising both in nominal and real terms after being adjusted for WPI inflation. In nominal terms, the outstanding per credit card stood at Rs8,668 as of February 2016, a rise of 15.5% year-on-year, the Ecowrap report says.
Further, SBI says, when the historical series is looked at, one finds the share of personal loans to total loans by ASCB increased prior to the global financial crisis of 2008. It increased to 23% by 2006 from 12% in 2001 and it declined subsequently.
According to the report, personal loans share is once again rising in the total loan portfolio leading one to wonder if this increase suggests a movement towards a similar glaring situation or it portends a brighter economic outlook ahead. However, personal loans share at present does not seem worrisome with the level even below March 2009.
"Though the rise in personal loans might suggest an improving economic momentum going forward, however increase in personal loans alone is not enough. This is corroborated by an in-house study about the relation between credit allocated to industry and personal loans over the past ten years which indicates that industry credit granger causes personal credit and not the other way round," it added.
During March 2016, WPI inflation remained in the negative zone for the 17th month in a row at - 0.85% compared with -0.91% in February 2016 and -2.33% in March 2015. However the larger question is whether this continuous disinflation for the past 17-months reflects worsening consumer demand, the report says.
According to SBI, despite the negative inflation for the past 17 months, the real outstanding has increased. This indicates that with WPI inflation consistently undershooting projections, the real value of nominal debt or credit card outstanding has become higher than expected. The result does not change much even if we take consumer price inflation into account. This may, in turn, contribute to the building up of financial risks and make it difficult for households to manage their balance sheets, it added.