Boom To Bust, Indian Middle-Class Is Teetering On The Edge

India’s growth engine of three decades has suddenly run out of steam, taking with it any vestiges of pride and hope. The only high now are rising EMIs and threatening collection calls. The fall has been hard.

Given yesterday’s picturesque financial backdrop, today’s fall is quite unreal. Middle-class loans are at an all-time high, savings are at 50-year lows, and increasing loan defaults leading to alarming bank non-performing asset levels. The Reserve Bank of India has flagged concerns over rising delinquency and leverage in unsecured loans, calling for “enhanced vigilance and monitoring”.

Financial waters are murky, with the share of unsecured loans in total bank credit rising year-on-year since 2015, touching 25.5 per cent in March 2023. Red-lining this drift in its ‘Trends and Progress of Banking in India 2023-24’ report released in November 2024, the RBI said: “Some entities have high ceilings that need monitoring. Prudence is (very) important to maintain systemic stability.”

Time and again, banks and other financial credit firms have been asked to maintain an eagle vigil on disbursals. The RBI has proposed an in-depth examination of the private credit market, warning that while the size of many firms and the resources raised are finite, inter-linkages between private credit firms, banks and NBFCs “could give rise to systemic concerns”.

The Trigger: Alarming Middle-Class Loan Offtake

Behind RBI’s advice to banks and credit firms is an alarming fall in middle-class financial stability. Banks’ non-performing assets (NPAs) are dangling on a fraying thread. Personal loan NPAs have crossed 51 per cent to touch Rs 11,700 crore. Credit card defaults are up 28 per cent to Rs 6,742 crore (Rs 1,108 crore in 2020 and Rs 5,200 crore in 2023). The latest cause for alarm — rising defaults on gold loans.

Gold loan NPAs have risen by 51 per cent. Pushed to the wall, banks reveal that gold loan defaults touched Rs 2,040 crore in December 2024, from Rs 1,404 crore a year ago. Finding ‘irregularities’ in loans issued against gold ornaments and jewellery, the RBI has asked lenders to closely monitor their portfolios and scrutinize third-party service providers carrying out ‘outsourced surrogate activities’.

In ‘other loans’ extended by banks, those for education fared better from the re-payment perspective, as NPAs dropped from 5.8 per cent in March 2023 to 3.6 per cent in March 2024, and to 2.7 per cent by September 2024. However, student education loans continue to have the highest NPA levels in the retail segment, followed by credit card receivables and consumer durables.

How And When Did India’s Boom Turn To Bust?

The slide began in 2017-18, when private sector salaries began stagnating, or went down. Jobs dried up and unemployment numbers inched above the 40-per cent mark. Two years of scratching and thrashing to make ends meet were pummelled by the COVID pandemic, which brought global business to its knees. For many middle-class Indians, loans and borrowings were the only option left.

Most began with personal loans to meet household expenses and cash pay-out obligations. As things worsened, new loans were taken to pay off existing loans. The circle went on till many had taken five to six loans. As banks denied further borrowings, people began swiping credit cards for cash, soon maxing these out too.

This was when the middle-class began opting for gold loans. Mind you, these were more than mere ‘loans’ — they took away from most not just the family gold, but pride and self-esteem too.

Ritesh Srivastava, CEO of credit resolution company Creed, explains: “People availed of loans like there was no tomorrow. Today, we have hundreds of clients who earn between Rs 40,000 and Rs 55,000 a month, but have taken 5-6 loans, each of Rs 6 lakh, totalling Rs 30-36 lakh. How can they pay back even the interest?”

Ironically, if stagnating salaries and lost jobs led to more loans, defaults on these loans began creating new job categories. Banks and private microfinance lenders went into overdrive to appoint ‘Recovery Agents’, paying them Rs 15,000 per month, plus commission (up to Rs 60,000 per month). Educational qualifications required — ‘12th Pass’ or ‘MBA’.

Also born was the business called ‘Credit Resolution Company’, which advises people on how to repay their loans. That is where people like Ritesh Srivastava (mentioned above) come in and are doing well. As Ritesh adds: “Annual growth over the last two years has been 15 per cent.”

What Killed The Classic Indian ‘Savings Trick’?

In India, (especially in Bollywood movies), the lady of the house always saves the day, hiding currency notes and coins in rice or pulse dabbas (storage bins) for the rainy day. But that is now gone, a grim reflection of severe financial stress.

Inflation has devoured incomes while future uncertainty has killed entire industry sectors. The household safety net has been stretched to breaking point, and beyond. What everyone is grappling with today is the dreaded morning-after hangover. Look at these numbers.

India’s per capita income has touched US$ 2,841 (around Rs 2,12,000), ranking it at #122 out of 197 countries. Sri Lanka (US$ 3,672) and Thailand (US$ 7,182) are ahead of India, as are many others. 

Since January, two-wheeler sales (a reflection of middle-class financial health) are down 9 per cent — motorcycle sales have slipped 13 per cent, while moped sales are down 18 per cent. 

As of June 2024, household loans were 43 per cent of the country’s Gross Domestic Product (GDP). In March 2020, these were 35 per cent of the GDP.

The government, along with the RBI, has apparently pulled out all stops to shore up banks and clean up India’s murky financial cesspool. Chief Economic Advisor V A Nageswaran has repeatedly said the outlook remains positive and the growth story is intact; this has seen the government stick to its target of an Indian per capita income projection of Rs 15 lakh by 2047. 

That, however, is part of future financial outlook. Today’s reality is that 23 per cent people are tetchy that salaries have gone down further over the last year. Clasping the final straw, the middle-class is still flogging gold loans to an extent that they have risen by 71 per cent in FY 2024-25 alone. In the year before that, gold loans increased by 17 per cent. It is this bleeding that needs to be stemmed.

(The writer is a veteran journalist and communications specialist. Views are personal)