As the net household savings have moderated primarily due to an increase in household leverage, a recent report has highlighted the need to monitor the growth of unsecured lending driven by non-banking financial companies (NBFCs) and fintech companies. A report by CareEdge Ratings has stated that while unsecured loans have seen a significant recent increase, housing loans, which constitute more than 50 per cent of retail loans, have remained the primary driver of household leverage.
As per the report, the post-pandemic period saw a significant growth in unsecured loans, including outstanding credit card debt. Credit card debt grew at a compound annual growth rate (CAGR) of 21 per cent in the post-pandemic period, higher than the CAGR growth of around 12 per cent in the pre-pandemic decade (financial year 2009-2019).
The emergence of new fintech players, supported by Non-Banking Financial Companies (NBFCs), has led to greater penetration of consumer credit, thereby accelerating the growth of unsecured loans. NBFCs and fintech lenders now account for approximately 70 per cent of the below-35 age group segment, up from around 50 per cent in 2017.
As per the report, to address growing concerns about strong growth in the personal loan segment, the Reserve Bank of India has increased the risk weighting of certain unsecured retail loans from 100 per cent to 125 per cent while the risk weights of credit card loans were increased from 125 per cent to 150 per cent.
As of FY23, household debt stood at 38 per cent of GDP and 51 per cent of net household disposable income. Although household debt has slightly decreased from its peak of 39.2 per cent of GDP in FY21, it continues to grow relative to net disposable income, as mentioned in the report.
The net household financial savings have been on a downward trend mainly due to a rise in financial liabilities. Since FY20, gross financial savings have increased at a CAGR of 9 per cent (lower than 11 per cent witnessed in the pre-pandemic decade), while gross financial liabilities have surged at a CAGR of 26 per cent (significantly higher than 17 per cent CAGR in the pre-pandemic decade).
On the other hand, the gross financial savings remained largely stable, falling marginally to 11 per cent of GDP in FY23 down from the pre-pandemic (FY10-FY19) average of 11.6 per cent of GDP.
The report concluded on a note that a sustained rise in household income is crucial for supporting household savings and for keeping household leverage under control. It mentioned that a structural change is evident which is characterised by the increasing digitalisation and the easy availability of credit.
