Pandemic induced inflation and income deficit has led millions of borrowers to max out on their credit cards. Credit card borrowings, as of March 2022, stood at a whopping 1 Trillion Rupees. This is the fastest rise in credit card borrowing since 2005.
Experts attribute this jump to a combination of factors, like increase in consumption since the easing of pandemic restrictions, and the lack of an effective stimulus package. Many people lost their job or didn’t receive their salary for months, which led them to depend on credit cards for their daily expenses.
Credit card spending increased by 48% year on year in March 2022, surpassing Rs 1 trillion for the first time five months earlier, in October 2021, buoyed by festive season spending.
- The Reserve Bank of India (RBI) reported that expenditure in March was Rs 1.07 trillion, a 24.5% increase over February.
- Moreover, more than 1.9 million credit cards were added (on a net basis) in March, the most for a month in FY22, bringing the total to 73.6 million at the end of the fiscal year.
- As a result, 11.6 million credit cards were incorporated in a year (on a net basis). Credit card additions (on a net basis) increased by 31.7% month over month.
“March has traditionally been a strong month.” However, spending momentum should continue,” said one analyst who follows the numbers. In an earnings call last month, Anup Bagchi, executive director of ICICI Bank, said, “We are seeing consumption coming up as Covid-19 recedes.”
How Does Increasing Credit Card Debt Affect The Economy?
According to the latest data, consumers have kept retail spending at higher levels as inflation has risen. According to the Reserve Bank of India, personal debt reached Rs. 35.2 trillion at the end of June this year. Simultaneously, interest rates began to rise from an all-time low, and retail inflation reached an eight-year high of 7.4%.
“The headline CPI inflation rate remained at or above the upper tolerance level of 6% for the sixth consecutive month in June 2022. Inflationary pressures will continue to be heavily influenced by evolving geopolitical developments, international commodity market dynamics, global financial market developments, and the spatial and temporal distribution of the south-west monsoon”, last week, the Governor of RBI stated.
Consumer debt levels have risen across the board
Consumer debt levels have risen across the board, but mortgage, vehicle, and credit card debt were the primary drivers of the overall rise. Housing loans have increased by nearly Rs. 4 trillion since July 2020, auto loans have increased by nearly Rs. 2 trillion, credit card debt has increased by Rs. 515 billion, and debt classified as “other personal loan” in the report has increased by Rs. 2 trillion. Loans against shares and bonds, on the other hand, remained flat at around Rs 3 billion.
Personal credit rose at an annual rate of 18% in June 2022
Personal credit rose at an annual rate of 18% in June 2022, more than doubling the percentage point (9%) from July 2020, before the peak of the COVID-19 pandemic. In the last two years, the total amount of personal loans outstanding has increased by nearly Rs 10 trillion.
Is Rising Personal Debt A Good Thing Or A Bad Thing?
In an ideal world, household saving and spending drive the economy. Spending generates demand, while saving encourages investment. However, in times of financial stress, consumption trumps savings. A recession reduces savings while increasing consumption after exhausting all available fund resources, including borrowing.
The present scenario is not disconcerting, but depending on credit-based individual consumption for a long period of time may pose a significant challenge to the economy. Historically low interest rates or no-cost EMIs, as well as fierce competition among lenders, enticed millions of Indians to borrow to purchase a home or consumer durables.
Let’s Look At The Big Picture
Personal loan demand increased during the first quarter of the fiscal year 2023. Personal loan balances increased in April. After a brief pause in May, it increased again in June. Consumer durables and gold loans have seen the most growth, followed by vehicles and credit cards.
Personal debt is not only increasing in India. To cope with ongoing, record-high inflation, household debt in the United States surpassed $16 trillion for the first time in the second quarter of 2022. Credit card user balances increased by $46 billion during the same period, representing a 13% increase and the largest year-over-year increase in 20 years, according to the New York Federal Reserve.
HDFC Bank, the country’s largest credit card issuer, increased its market share in this segment to 26.6 percent in March from 25.7 percent in February, while ICICI Bank’s fell slightly to 19.4 percent.
SBI Cards, on the other hand, increased its market share to 19.1%.
“Spending market share has increased dramatically for both HDFC Bank and SBI Cards.” “Because spends typically have a 6-9-month lag, HDFC Bank’s revocation of the ban in August 2021 has finally resulted in them seeing a pickup in spends market share over the last couple of quarters, which is encouraging,” said Macquarie Research in a report.
Axis Bank, the fourth-largest player in the space, added the most net credit cards at 433,966 among the top issuers, followed by HDFC Bank with 263,864, SBI Cards with 245,133, and ICICI Bank with 205,360.
The rate of net addition increased after the RBI lifted the ban on HDFC Bank issuing new credit cards in late August of last year. Between September 2021 and March 2022, it added (on a net basis) nearly 1.8 million cards.
SBI Cards added 1.36 million, ICICI Bank 1.52 million, and Axis Bank 1.72 million during the same period.
“There has been a marked rise in card additions by players outside the top 8, with a four-fold increase in additions since Sep-2021 and a sharp Rs 100bps increase in market share” (both in spends and card additions). A closer examination reveals that BOB Cards, IDFC First Bank, IndusInd Bank, and Federal Bank have all contributed to the increase in card additions,” according to the report.
The Covid-19 pandemic has caused a surge in household debt relative to GDP. According to a State Bank of India study. Household debt increased dramatically from 32.5 percent in 2020 to 37.3% in 2021. (BIS estimates are at 37.7 per cent as of Dec 2020). The bank, on the other hand, hopes that household debt as a percentage. Of GDP “has declined to 34% in Q1FY22 with the commensurate rise in GDP in Q1, even though it has increased in absolute terms.”
Rising household debt, according to a Bank for International Settlements paper, fuels consumption and GDP growth in the short term. In the long run, if the share of household debt in GDP exceeds 60%, the economy will suffer. However, India’s situation is not alarming because household debt is less than 1% of GDP.