The fast growth in non-housing personal loans ought to worry us

Outstanding personal loans were up 30.8% as of end-August in comparison with August 2022. This figure does not give us the correct picture because in July the home-loan lender HDFC merged with HDFC Bank. RBI data for outstanding loans of banks as per economic activity does not adjust for this. Hence, we need to consider the end June data as well.

Outstanding personal loans had grown 20.9% as of June-end. Das’s statement was more likely hinting at the non-housing part of personal loans. These grew 26.7% in June.

There have been only two occasions when growth has been faster than this (February and March 2020). Nonetheless, non-housing personal loans have been growing at greater than 20% since June 2022—that is for a period of 15 months now. In July and August, their growth rate was 26.1% and 24.1%, respectively.

The data for yearly growth in personal loans is available from April 2008 onwards. In all these years, non-housing personal loans have never grown at greater than 20% for so many months. The longest had been a period of eight months from November 2017 to June 2018. Also, the share of these loans in personal loans reached a high of 53.1% in June. They were at 50.3% in March 2022. So, there is some reason for worry, given that most of these loans are used to finance immediate consumption or buy depreciating assets (like cars, mobile phones, etc.)

Why is this happening? First, from primarily lending to industry, banks now give out more personal loans. Bank lending to industry stood at 45.8% of non-food credit as of March 2013. It has fallen to 24.4% as of March 2023. Banks give loans to the Food Corporation of India and other state procurement agencies to primarily buy rice and wheat directly from farmers. Once these loans are subtracted from overall bank credit, what remains is non-food credit.

As of March 2013, personal loans formed 18.4% of non-food credit. They stood at 29.9% as of March 2023. Further, during this period, non-housing personal loans have gone up from 9.1% to 15.7% of non-food credit. So, banks are now more inclined to give out personal loans, given that Indian industry has still not come out of the after-effects of its earlier borrowing binge or the fact that it’s easier for banks to recover a bad loan from an individual defaulter than an industrial one.

There might be other reasons for this jump as well. First, people might be indulging in revenge consumption after the pandemic and financing it through loans. The rapid growth in credit card outstanding is proof of that. In March 2022, it grew 12.7%, jumping to 36% in June and 30% in August. Other personal loans (referred to as personal loans in common parlance) had grown 16.6% in March 2022, and at over 26% in both June and August.

Second, it could also mean that sections of society are struggling on the income front and borrowing to meet expenses. In fact, loans against gold jewellery had contracted 1.5% in March 2022 and 2.7% and 2.4% in April and May 2022, respectively. In June and August this year they grew 26% and 22%, respectively. Advances to individuals against fixed deposits had grown 7% in March 2022. Their growth jumped to 46.4% in June before slowing to around 20% in August.

Third, a K-shaped economic recovery might be fuelling borrowing behaviour. Domestic car sales peaked at 3.9 million units in 2022-23. From April to September, more than two million cars have already been sold. Also, consumers seem to be buying fewer entry-level cars, suggesting that the rich and well-to-do are buying expensive cars and taking on a greater proportion of loans as well, fuelling growth in vehicle loans. These loans grew 8.8% in March 2022 and 22.9% and 20.6% in June and August, respectively.

The interesting thing is that rapid growth in non-housing personal loans has happened despite rising interest rates. As RBI’s State of the Economy report for September points out: “The share of loans below 8% interest rate has come down from 53% in March 2022 to 18% in June 2023. The share of bank loans at [an] interest rate of 10% or above increased from 22% to 34% over this period.” Typically, when interest rates go up, we expect lending growth to slow down. But that hasn’t happened here, though the growth of industrial loans has indeed slowed down.

A possible explanation is that on the whole, individuals taking on these loans are really not bothered by the higher monthly instalments they need to pay. This hints again of a K-shaped economic recovery, with the rich and well-to-do taking on a greater proportion of these loans. At the same time, a jump in some loans does suggest struggles on the income front as well.