Increase In Resolving Debts Through Personal Loans
Last week witnessed a surge in sentiments due to higher-than-anticipated GDP figures. However, the subdued growth in private consumption is dampening the prevailing optimism. The slow expansion in consumer spending raises concerns about the ultimate use of funds in the face of robust growth in personal loans. Questions have emerged regarding whether borrowers are directing these funds towards repaying existing loans or engaging in speculative activities in the stock market.
Despite the significant increase in personal loans—30 per cent in September, 31 per cent in August and 32 per cent in July, according to Reserve Bank of India (RBI) data—private final consumption, encompassing consumer spending on goods and services, only grew by 3.1 per cent in the second quarter of the current financial year. The total outstanding personal loans of commercial banks reached Rs 48.26 trillion as of September-end this year.
Bankers express uncertainty about the exact purpose of personal loans, with borrowers often indicating "personal use" without specifying the end use. Some borrowers are observed using these loans to purchase consumer goods or settle existing loans and credit card dues, according to the head of retail banking at a private bank.
Personal loans are also sought to bridge shortfalls in down payments for home and vehicle loans. Additionally, a bullish trend in the stock market has driven demand for personal loans, with individuals leveraging these funds to speculate on shares amid rising prices. However, experts caution that many individuals end up losing money in such ventures.
While the low private consumption amid high personal loan growth might be seen as a positive development for the central bank, signaling a reduced risk of an overheating economy, experts emphasise that the Reserve Bank of India (RBI) and the Monetary Policy Committee (MPC) should remain vigilant to minimise the risk of general inflation, balance of payment issues, and currency concerns.
