Credit cards may result in spiralling household debt

The rise in credit card spends may not augur well in the long run especially since we are witnessing a persistent slowdown in inflation. This may add to a build up in financial risks, making it difficult for households to manage their balance sheets, warns a report by the country’s largest lender State Bank of India.

Outstanding per credit card amounted to Rs 8,668 as of February 2016, up 15.5% year-on- year, computation from RBI data shows. An analysis by SBI shows that with WPI inflation consistently ending up lower than projected levels, the real value or inflation adjusted credit card outstanding has become higher than expected.

This in turn may contribute to the building up of financial risks and make it difficult for households to manage their balance sheets, says the SBI analysis. “If inflation is negative over a longer period (as WPI is currently), further expectations about falling prices may lead to falling aggregate demand and we can get into a vicious cycle of lower prices” says SK Ghosh, chief economic advisor, State Bank of India in the report.

The report further goes on to warn that persistent low inflation may lead to a situation that Japan landed in the 1990s. Such a spiral may be difficult to break out of. “This in itself is a greater financial risk. Alternatively, the benefit of such policy—in the form of lower risks from household debt—is therefore completely insignificant compared to the cost in terms of higher unemployment and lower inflation.” SBI report said.