Post-pandemic India Learns To Live The ‘Loan’ Life As Expenses Continue To Hit Hard

The onset and peak of the pandemic saw Indians preparing for the worst and hanging on to every paisa they could, sending household savings surging to 11.5 per cent of the GDP, data released by the Reserve Bank of India (RBI) reveals.

In stark contrast, post-pandemic India saw a different and chilling scenario. As millions who had lost livelihoods to the Covid-19-triggered economic backlash dipped into their bank accounts to make ends meet, savings crashed to a 47-year low of 5.1 per cent of the GDP in FY 2022-23, sliding from the previous year’s 7.2 per cent.

This multi-decadal low was a result of rising borrowings to meet personal consumption needs, one that also saw total financial assets hit a low of 10.9 per cent of the GDP in FY 2022-23, from 11.1 per cent in FY 2021-22.

If one goes by the RBI’s methodology to visit household savings data and arrive at ‘net financial assets’, the story gets even more grim. Net financial assets are made up of bank deposits, capital market investments, life insurance policies and PF, minus gross financial liabilities (primarily bank or nonbank financial companies loans).

Simply put, today’s average Indian, especially those who have lost jobs or taken salary cuts, are borrowing so heavily to survive that they have overtaken the credit taken by both Indian industry and the services sector for the first time, ever.

Financial Cross-purposes

As incomes shrank and expenditure rose during Covid-19, predominantly on the back of higher inflation, the offtake of personal and retail loans jumped. Optimistic authorities assumed that higher industrial and services credit offtake would reverse the trend when the economy recovered post-pandemic.

That hasn’t happened, with the two post-pandemic years only seeing retail loan growth flourish—from 27.6 per cent of total non-food gross credit in 2020-21 to 31 per cent in 2023-24 (till 23 February 2024). Shrinking credit extension to industry, from 27 per cent to 23.2 per cent, in the same time period, is also cause for concern.

To an extent, the culprit in the economic stagnation is hope. Hope that the pandemic’s end would mean a return to earlier financial well-being.

Achieving GDP growth fuelled by credit-driven consumption is nothing new and such a credit-centric economic model has been adopted by different countries, sometimes with a fair amount of success. But, that success hinges on two questions—are there hidden nuances in the bank credit data; and does the growth in retail loans directly translate to household budget distress?

Rise And Rise Of Loans

Admittedly, the trend of resorting to personal loans started before the pandemic, as aspirational Indians in urban and rural areas reached for the pie and the sky, pushing interest rates manifold.

Covid-19 came and arrested this phenomenon that reached the crescendo in 2018-19, when growth was at 20.7 per cent. With loan offtakes slower for two years, industry and services sector credit saved the day for banks and NBFCs; while total offtakes normalised after the pandemic, they remain at relatively low levels. 

It is ballooning post-pandemic personal loan figures that paint the raw picture of household finances in India, with the devil lurking in the details. Historically, housing and vehicle loans have been the heavy guzzlers of retail loans. Even in 2023-24, they remained the top grossers, making up 47.2 per cent and 12 per cent of total retail loans, respectively.

However, it is the comparative growth rates of different categories of personal loans in pre and post-pandemic times that reveal loan abnormality, with the top perpetrators being credit card outstandings, loans against gold and ‘other’ personal loans.

Loans against gold grew 308 per cent between 2019-20 and 2023-24, credit card outstandings were up 215 per cent and other personal loans rose 194 per cent. During this time, total retail loans grew by 178 per cent, with housing loans rising 168 per cent and vehicle loans up by 172 per cent, both well below the average growth of total retail loans. 

Warning Signs

The rapid accumulation in credit card outstandings and over 300-per cent growth in mortgaging gold are ongoing warning signs, pointing to the inability of Indian households to keep pace with increasing expenses.

For a typical family, mortgaging gold jewellery is always a desperate, last resort. And while India has slowed down on new homes, cars and other indulgences, emergency expenditures such as health crises, education, and urgent repairs just cannot wait.

If people are being left with little choices, banks are being cautious in providing loans for education and housing. Education loans were 6 per cent of the total in 2013-14, but that share has come down to 2 per cent in 2023-24. Even the share of housing loans in total loans has come down to 47 per cent in 2023-24, from 53 per cent in 2013-14.

To explain away these tell-tale signs of rising financial liabilities and dwindling financial savings of households, an explanation has been offered, using earlier bouts of low inflation and low interest rates as the anchor.

The submission is that a hitherto low interest rate regime prompted households to buy more houses by taking loans, leading to a shift from household financial savings to household physical assets, like houses and landed properties. This explanation, though, underplays sliding net household savings.

As the regulator of banks and financial institutions, the RBI is aware of the rising distress in retail bank loans, as revealed by recent supervisory actions against banks and NBFCs related to gold loans and credit card outstandings. By its very definition, though, the ‘unsecured’ nature of retail loans poses a systemic risk to any financial system, more so in today’s distressed times.

The need of the hour is to not just ensure loan-worthiness and re-payment capacities, but to create an environment that empowers people to do so. Household financial stress cannot be resolved by any monetary policy, and employment and income-generation are the only keys to tackle this issue.

We are a nation fighting off historically-high unemployment rates, with the world’s largest congregation of the middle class facing never-before savings constraints. Some never-before policy initiatives are in order to make a turnaround… and turnaround we must.