In a year marked by inflation and economic challenges, a significant portion of India’s middle class has curtailed spending on non-essential items. However, paradoxically, there has been a surge in the purchase of consumer products made possible through credit, providing a boost to India’s consumption levels amid global economic slowdown post-pandemic.
This has led the RBI to take note which was the second time has warned banks on the surge in their personal loan portfolios.
One of the driving factors behind this consumption uptick is the availability of unsecured loans, which require no collateral. These loans encompass various categories, including loans for consumer goods, personal loans, and credit cards. While official data does not currently ring alarm bells, certain lending parameters do warrant caution.
India has witnessed a rise in travel enthusiasts, primarily millennials, young working professionals, and the emerging middle class, despite financial constraints. Many are opting for flexible payment options such as Travel Now Pay Later (TNPL), which have experienced significant growth since the pandemic.
In the consumer durables segment, people are increasingly willing to upgrade their purchases and are open to availing EMIs (Equated Monthly Installments) when outright prices are unaffordable. According to a study by consumer finance provider Home Credit India, approximately 75% of surveyed customers utilised credit to acquire consumer durables and home appliances. Moreover, consumer sentiment is positive, with a substantial portion of low-income urban consumers experiencing income growth.
Unsecured loans are particularly popular among the low-to-middle-income segment, with Gen Z and millennials exhibiting significant demand. Ticket sizes for smartphone loans range from Rs 10,000 to Rs 40,000 and can extend up to Rs 75,000, while personal loans can go up to Rs 5 lakh.
Delinquencies rise
Data from the credit information bureau TransUnion CIBIL indicates that unsecured retail loans have grown at a CAGR of 47%, while credit card delinquencies have also risen. Responsible lending practices and continuous portfolio monitoring will be essential to sustain the growth momentum in retail loans.
The ease of borrowing, including no-cost EMI options, is driving the surge in unsecured loans. Products like TNPL offer flexibility and quick loan approvals, making it convenient for consumers to access credit for various purposes. The aspirational middle class increasingly prefers no-cost EMIs over blocking funds, contributing to the growth of unsecured loans.
Non-banking financial companies (NBFCs) are making loans more accessible, particularly for consumer electronics, lifestyle, and lifecare products, by approving loans within minutes. Credit card spends have exceeded debit card spends, reaching new highs.
Household debt is on the rise, raising concerns about repayment obligations amidst sluggish income growth. Analysts note that household debt witnessed its highest growth in 21 quarters, primarily driven by non-mortgage debt.
While unsecured loans have fuelled consumption growth and provided financial flexibility, cautious lending practices and vigilance by regulators will be essential to mitigate potential risks in India’s credit landscape.
