India's Urban Consumption Problem May Have A Credit Angle

RBI's monthly sectoral credit data shows that loan growth in credit cards, unsecured personal loans and loans for white goods have all come down over the last year, as banks pull back. Credit card growth has dropped to below 20% in September, while consumer durables loan growth is trending in single digits.

In November 2023, Reserve Bank of India introduced higher risk weights for retail unsecured loans extended by banks and non-bank finance companies.

"Certain components of personal loans are, however, recording very high growth. These are being closely monitored by the Reserve Bank for any signs of incipient stress," the RBI had said on Nov. 16, last year.

With loan growth in these segments slowing, lenders are also seeing higher delinquencies.

Non-bank lender Bajaj Finance Ltd. reported a sharp uptick in its expectations for credit costs this year, raising it from 1.75–1.85% to 2–2.05%. The company is further increasing scrutiny of customers who have multiple unsecured loans, in a bid to safeguard its balance sheet.

Similarly, Kotak Mahindra Bank Ltd. reported elevated slippages during the second quarter, as its credit card book saw customers defaulting.

In case of Axis Bank, for example, retail slippages accounted for Rs 4,073 crore of the Rs 4,443 crore reported during the second quarter.

"...it is largely unsecured retail where we have found slippages in the current quarter," Axis Bank CFO Puneet Sharma told analysts after announcing the bank's quarterly results.

As the financial system deals with the after-effects of regulatory tightening on consumer credit, the real economy is also facing serious headwinds.

Suresh Narayanan, chairman and managing director of Nestle India Ltd., pointed this out recently when he told reporters that the Indian middle-class was "shrinking".

He pointed out that megacities and metros were the latest "pressure points," dragging down overall growth. The "shrinking of middle class" is leading to reduced spending over the last two to three quarters, in stark contrast to previous years, when slow quarters typically rebounded quickly, Narayanan said.

Another consumer indicator, retail passenger car sales have dropped by 10% month-on-month, with dealers sitting at 80-85 days worth inventory, according to FADA.

Cash withdrawals using credit cards, widely considered to be a sign of stressed borrowers, has been trending over Rs 400 crore a month for most of this year. It had reached a peak of Rs 458 crore in April.

"The impact of RBI actions was bound to show up somewhere," Suvodeep Rakshit, chief economist at Kotak Institutional Equities, said. When the regulator announced its curbs, there were a few areas which it was looking at. These included excessive discretionary spending and easy availability of credit for speculative trading.

According to Rakshit, lower credit availability coupled with urban wages not growing could be further impacting urban demand. Analysts at Nomura Research agree.

When deflated by urban CPI, real salary and wage expenditure growth of listed non-financial corporates—a proxy for real urban wages—has moderated to 0.8% year-on-year in September quarter this fiscal from 1.2% in the June quarter. It is further down from 2.5% in previous financial year and 10.8% in the fiscal before that, the research house said in its report on Oct. 25.