Sunday 26 August 2018

Indebtedness among Indians is growing and you should be worried about it

Indebtedness in India is rising and the general public should be worried about it. There are two major reasons for it and the Indian general public should not ignore it. The first is industrial credit. Industrial credit is nothing but the loans provided to businesses or corporations. Industrial credit has been increasing for many years with debit card expenditure actually declining. The combination of industrial credit with consumer spending increasing over the past few years has signalled an era of growing indebtedness among Indian consumers.
As per the State Bank of India’s chief economic advisor, Dr. Saumya Kanti Ghosh, the indebtedness and the tendency to borrow money in Indians is increasing with every passing day. As per Ghosh the study for the past 10 years between credit availed and personal loans and the results showed that growth of credit industry would lead to increase in personal credit and not vice versa.

The economists have also listed the reasons for which everyone needs to be worried about the recent trend of earning more than the average customer is entitled to:
  1. The gap in the money that is deposited and the amount of credit that is spent has been widening recently. As per data collected, All Scheduled Commercial Banks Deposit Growth this year was recorded at 9.9% which is the lowest it has been in the past 53 years. Also, the credit offtake increased last year by 11.3%.
  2. The biggest contributor to the increase in lending growth has been the personal loan with most of the applicants applying it for housing and MUDRA. MUDRA is an enterprise that provides loans to small and micro organisations. However if the largest increase in all the segments in personal loan is considered it is the credit card that takes the cake.
  3. The household debt which is nothing but the amount of credit owed per credit card in India has been rising rapidly. The figure for the same stood at Rs.8,668 for the year 2016 with the increase from last year being 15.5% which is a significant number.
  4. Despite the drop in Wholesale Price Index (WPI) inflation due to the negative inflations over the past year and a half, the real outstanding has increased. This can only mean that the value of outstanding credit for the average person has increased more than the expectation.
  5. The nominal per capita income has been recorded at Rs.70000 whereas the outstanding credit stands at Rs.10000 and the difference between the two is worrisome to say the least.
  6. The gap between the nominal per capita income and the outstanding credit does not seem to decrease enough even if the consumer price inflation is considered. This only increases the financial risks that will be faced by your average household with balancing the sheets becoming increasingly difficult.
  7. If debit card and other mode of spends were rising along with credit card spends there was not much to worry but sadly that is not the case. Only credit card spends have been rising over the past 5 years.
  8. Two reasons which can be attributed to increased credit card expenditure include e-commerce transactions and lower inflation. The worrying factor is borrowing more money then the capacity to repay it back. This entangles the whole financial system and creates a circle of debt.
  9. Another factor to worry is the refinancing of existing loans on fresh credit cards that are being issued to the customers. This is a worrying trend which is redistributing the same pie in a fresh pan.
All is not gloomy
Yes, the increase in credit card expenditure is a worrying trend but all is not gloomy. There are upsides to the increase in credit card spending too. Increase in credit card expenditure on average per person in the country exhibits economic growth, an improvement in economic momentum and a surrounding in which the inflation is low. The transfer from an increase in the credit expenditure and decrease in the debit expenditure is known in economic terms as the structural shift.
If the absolute figures are considered, they are still under control. Before the year 2008, the credit card outstanding stood at 5% which is now at 3%. Let us no forget that the system of taking credit in India through the means such as credit card is fairly new and started just 20 years back. One way of restricting the amount of the ever increasing credit expenditure by setting the credit limit lower than what it currently is on average.

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