In a shifting financial landscape, the younger generation in India is grappling with a growing burden of unsecured debt. The contemporary youth often embrace a more modern approach to finance, relying on credit cards and Buy Now, Pay Later (BNPL) schemes to fulfil their desires.
This changing behaviour has resulted in a significant increase in the outstanding amount on credit cards in India. The outstanding amount reached a staggering Rs 2.10 lakh crore in March 2023, a substantial 28% increase compared to Rs 1.64 lakh crore in March 2022. Additionally, credit card payment defaults have witnessed a concerning surge in June 2023.
The question arises: who are these borrowers, and what is causing this issue?
According to recent reports, a striking 40% of the demand for retail loans comes from younger borrowers aged between 18 and 30 years.
The current scenario sees household savings at a 50-year low, while retail unsecured loans are reaching unprecedented levels.
A notable shift in lending practices has occurred over the years. In 2015, banks primarily allocated 43.55% of their loans to industries, while personal loans accounted for only 19.11%. However, as industrial loans faced a rise in non-performing assets (NPAs) and subsequent losses, banks shifted their focus towards personal loans.
By the middle of the financial year 2020-2021, the allocation of personal and industrial loans had nearly equalised. Since then, personal loans’ share has continued to grow, while industrial loans have significantly decreased.
In 2023, the total credit share for personal loans increased to 29.87%, while industrial loans dwindled to 24.4%.
Unsecured loans now constitute a significant 30% of the total assets under management of large NBFCs, indicating a notable shift in their loan portfolio towards unsecured lending.
What is fuelling the credit boom?
Fintech companies facilitate easy access to smaller loans, some as low as Rs 25,000. This accessibility tempts young individuals to take on debt for various purposes, including lifestyle expenses and emergencies, often relying on the EMI system.
The ease of obtaining unsecured loans, especially small-ticket loans and credit cards, is a significant factor. These financial products require minimal documentation and are readily available to young borrowers with limited credit histories.
Many young individuals aspire to modern lifestyles, incurring significant expenses that may exceed their income. The desire to keep up with peers and societal expectations can lead to overspending and reliance on credit.
Delinquency rates for credit cards have been on the rise, indicating that many borrowers struggle to manage their credit card debts effectively. Delinquency rates for credit cards rose by 2.9% in June 2023.
The surge in retail unsecured loans has given rise to a new industry – Retail Debt Resolution companies. These firms specialize in assisting individuals in managing and resolving their debt-related challenges. They provide services such as debt consolidation, negotiating with creditors, and financial counselling to help borrowers regain control of their finances.
The credit binge and subsequent impact on financial institutions has prompted the RBI to issue repeated warnings on rising unsecured loan portfolios. Going forward, experts say it is crucial to strike a delicate balance between lending and borrowing practices. By navigating this path carefully, India’s digital revolution can continue to be a symbol of progress without evolving into a debt-centric economy, they say.
