India wrestles with unsecured lending hangover

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Increasing loan and credit card debt racked up by young Indians splurging on aspirational purchases from clothing to holidays has raised concerns about rising delinquencies and a wider lending slowdown.

About a third of millennials and 40 per cent of Gen Z Indians are submerged under unsustainable borrowings, estimates Freed, an Indian debt resolution platform. The average Freed client has six loans equalling Rs560,000 ($6,694), up from four loans worth Rs520,000 in April.

“You have this aspirational spending meeting easy borrowing,” Ritesh Srivastava, founder and chief executive of Freed, told the Financial Times. “What makes it worse in India is that there’s a lending boom, there’s a lack of financial literacy and household savings are at an all-time low . . . that’s a heady cocktail.”

The Reserve Bank of India has repeatedly warned about the rapid rise of unsecured lending after Indian banks and fintech companies offered easy credit to millions of the country’s growing middle class following the coronavirus pandemic. In August, central bank governor Shaktikanta Das reiterated his concern about the continued growth of loans “mostly for consumption purposes”.

Indian household debt is accelerating, though it remains low in comparison to developed countries. The country’s household debt to GDP hit a record high of 40 per cent in the most recent financial year ending in March, according to economists at financial services group Motilal Oswal. Personal disposable income in India has not kept pace with the country’s broader economic expansion and net financial savings were at a four-decade low last year, according to the Mumbai-based group.

Goldman Sachs analysts said in August that there were “rising concerns of deterioration in asset quality” in India, warning that the continued growth in unsecured loans “has led to significant over-leveraging of some households”.

Regulators have started trying to address the rise in delinquencies. In November last year, the RBI said lenders had to increase the risk weight, the minimum amount of capital they must hold in relation to the asset, for personal loans from 100 per cent to 125 per cent.

“RBI is worried about the rising cases of delinquencies at the unsecured borrower level and they want to pre-empt it,” said Abhay Agarwal, founder and fund manager at Indian asset manager Piper Serica in Mumbai, which exited its holdings in the country’s lenders in July.

“They don’t want the bubble to become so big that when it blows, it hurts the entire financial lending system.”

The RBI’s moves have helped ease growth in credit card and unsecured personal loans, with the overall pace of retail lending by banks moderating to 14 per cent in July from 31 per cent a year earlier, according to the central bank’s most recent data.

There’s a lack of financial literacy and household savings are at an all-time low . . . that’s a heady cocktail

But Nomura analysts estimate that personal loan delinquencies in India overdue by more than 90 days have increased to 5.1 per cent in the last financial year from 3.9 per cent.

Rajeev Jain, chief executive of Bajaj Finance, the country’s largest non-bank lender, told the FT that it had been pruning back its own exposure to unsecured lending after it became “hot”.

“Supply in a business like credit always finds demand . . . when so many people jump in it leads to some level of exuberance,” Jain said. “We are watching it carefully to see whether there could be more problems down the road.”

India’s shadow banks are expected to be hit by a rise in delinquencies of between 30 to 50 basis points in the year through to March 2025, resulting in increased credit costs, according to ICRA, an Indian rating agency owned by Moody’s Ratings.

“They had a great time post-Covid,” said Agarwal, referring to the lending sector. “But that party is now over.”