Holding all the cards

Last Updated: Sat, Dec 03, 2011 18:40 hrs

Middle-class Indian households have traditionally been abstemious when it comes to running up debt. This has usually been viewed as both a safety valve and a symptom. Why a symptom? Because the low level of household debt could mean that middle-class Indians are unable to access formal credit at suitable rates — which in turn indicates the continuing shallowness of the banking system. And it is certainly a safety valve, in that any macro problems with debt caused by irresponsibility from the state or from large institutional or corporate borrowers will not be exacerbated by high levels of personal debt among India’s citizens. Recent data from the Reserve Bank of India on the sectoral break-up of bank lending, however, should cause us to wonder how long these beliefs should hold. The data, which examines lending up till the third week of October 2011, indicates that — in spite of high interest rates — the amount of money that Indians owe on personal credit cards had increased 7.2 per cent in the seven months since the beginning of the current financial year. (Strikingly, the outstanding amount on cards had decreased 8.3 per cent in the equivalent period last year.) The number of outstanding credit cards rose in September, too, taking the number up to 17.6 million.

Is this a sign of maturing? In hard times, people should borrow more; such counter-cyclical smoothing of consumption is, after all, the basic purpose of personal finance. But, worldwide, consumers reduce their credit-card spending when growth slows. It might instead indicate a reversion to trend: banks insist that their credit card outstandings have grown because credit-card lending is safer than ever before, thanks to the growth of credit bureaux that track borrower history. Individual credit rating is, of course, a crucial part of a mature economy, especially as credit-card loans are largely unsecured. (In India, such bureaux are still new and untested — the first, CIBIL, was set up in 2004 by SBI, HDFC, Dun & Bradstreet and TransUnion.) The aggregate numbers for India’s household indebtedness continue to be low, but are rising: between 2001 and the onset of the global financial crisis in 2008, household borrowings rose from Rs 51,727 crore to Rs 1,73,136 crore, a jump of almost 240 per cent. While this change lags the increase in household assets, the simple fact that unsecured household indebtedness is rising sharply should nevertheless cause us to revisit our macro assumptions.

While all developing countries have low levels of personal debt — due to imperfect, low-penetration banking systems — it is nevertheless true that India’s household debt as a proportion of GDP has historically been lower than most comparable countries. Malaysia, for example, has a household-debt-to-GDP ratio of over 0.5. Another fact that has been identified as indicating a cultural aversion to credit in India is that payments made through debit cards have been steadily outpacing those made through credit cards. Yet if a cultural aversion to excessive personal credit is stronger here than elsewhere, then it may finally be breaking down. As societies change, and larger joint families fragment, the basic economics of income life-cycles and consumption smoothing comes into play; and that will, in turn, affect cultural norms about indebtedness. This mechanism has important implications for policy. The idea that India’s debt-to-GDP ratio can be more easily managed than that in the rest of the world, because it is dominated by what the state and large corporations owe, will have to be jettisoned.

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