Family on his mind, Reddy fears a debt trap
The central bank has flagged off its concerns on the rising debt of Indian households. Over the last one year, local households have absorbed a higher portion of the credit growth.
By Team ET, TNN |
The central bank has flagged off its concerns on the rising debt of Indian households. Over the last one year, local households have absorbed a higher portion of the credit growth. Historically, however, corporates have been the most important borrowers from banks.
According to RBI, there were risks of sustainability of the recent rapid pace of bank credit growth to households. The central bank has said that households could become overextended as reflected in credit card busts in several emerging economies.
Large accumulation of debt could leave households prone to future interest rate/exchange rate shocks since banks have, in effect, transferred a large part of their market risks to households.
Third, as it points out excessive reliance on debt-financed consumption could turn out to be a serious problem if refinancing options dry up. Fourth, moral hazard and adverse selection is a constant challenge facing banks. Fifth, housing markets continue to remain overheated and, therefore, a source of risk, it warned.
As of June 23, borrowings by individuals loans have seen a growth of 47.2% or Rs 1,04,058 in the past one year while credit to industry has seen only a 26.6% growth to Rs 94,133 crore in the period.
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The outstanding credit to individuals are at Rs 3,24,491 crore while that to the industry is at Rs 4,48,494 crore.According to Romesh Sobti, country representative CEO, ABN Amro, “There has been a sizeable increase in the portfolio of unsecured loans. There would be a significant difference in absolute numbers as even a 2% rise in default rates would have an impact on loan provisioning, even though the hit in profitability may not be much. Banks have started going to the bottom end of the pyrmaid and this segment could be affected more.”
“Worldwide there have been bad experiences in certain economies like Hong Kong and Korea where the growth in credit card loans and unsecured personal loans have been allowed unregulated/unchecked. To avoid a replication of this in the Indian economy the central bank is rightfully concerned in this regard. With interest rates on the rise middle and low income customers indulging in excessive use of personal and credit card loans to buy high end gadgets could be affected,” said Viren H Mehta, director, Ernst & Young.
Most banks have been focussing on retail loans for the past few years. This has created a sharp rise in credit in some of the retail loan categories like credit cards which have seen a 200% jump in credit of Rs 4539 crore in the past one year alone. Incidentally outsanding credit in the segment has also seen a sharp rise to Rs 6,818 crore. Home loans have also seen a growth of 54.3% of Rs 60,495 crore.
Customers especially in metros have been buying multiple properties on the back of lower interest rates in the last couple of years to take advantage of the rise in real estate prices. Also with increasing competition among banks, there has been a fear of adverse credit selection.
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