CARD DEBT RISE DIMS, BUT DEFAULTS WORRY

Credit cards account for just 5% of the total loans outstanding to individuals in India. Yet, they serve as a bellwether for household debt.

- BY HOWINDIALIVES.COM

About two years ago, the Reserve Bank of India (RBI) cracked down on two loan categories whose numbers had surged post-pandemic: unsecured personal loans, including credit cards, and bank loans to non-bank finance companies, or "shadow" banks.

Since then, growth in these loans has slowed sharply. As of 22 August, credit card balance outstanding grew around 4% year-on-year, down from roughly 20% a year ago. Still, risks linger.

TEMPERING GROWTH

ACCORDING TO RBI, about 112 million credit cards, a quarter of them issued by public sector banks, are currently in circulation. Monthly data for the current decade shows that growth in credit card balance outstanding started rising sharply in early 2022 and its year-on-year growth hovered between 25% and 32% per month for about 18 months thence. One reason was that higher-income households were eager to make up for reduced spending owing to the covid-19 pandemic.

But when the pace of spending remained high, nervousness crept in, especially as growth in unsecured personal loans and loans against gold jewellery also accelerated. Together, they signalled a rise in household debt at a time when employment growth was subdued. In response, RBI tightened regulations on unsecured personal loans. In late 2023, it raised the "risk weight" on consumer credit, which mandated banks to set aside more capital for such loans. This increased the cost of funds, effectively making it more expensive for banks.

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