Budget 2023: The hidden trap in India’s consumer loan surge

The new peak in India’s credit offtake is fast becoming a trophy to showcase the rise of the Indian economy. But RBI’s optimism over a broad-based and robust growth in bank credit in FY23 (April-November 2022), in its latest bulletin of January 2023, is a bit exaggerated and misses the big picture: Credit offtakes continue to be inverted and are led by ‘personal loans’ which go into the consumption economy, rather than return-generating loans taken by ‘real’ sectors of economy like agriculture, industry and services. A consumption-led growth that the growth in personal loans reflect, points to an eventual flattening of growth and higher dependence on imports to meet consumption demand. The global recessionary trend is likely to worsen India’s growth prospects.

Analysis of the RBI data for FY23 (April-November 2022) shows growth in bank credit to non-food has improved marginally – from 8.7% in FY22 to 8.9% in FY23 so far – but the monthly moving average shows the credit growth is stalling in November (data available up to November 18), after a robust credit growth in July-October 2022.

The trend would become clearer when the RBI releases disaggregated data for the full month of November and subsequent months. A business daily reports that the credit growth hit five-month low in the fortnight ending December 30, 2022, but this data is not in public domain. Given the rising interest rates in India and the US, the momentum in credit outflow is likely to go down.

Meteoric rise of personal loans to the top

But far more worrying development is the inversion in credit outflows.

Personal loans continue to lead over others in FY23 – a trend that began in FY20. During the first eight months of FY23 (April-November 2022), the average monthly share of personal loans stood at 29% of non-food credit, followed by industry and services at 26% each. Within industry, the shares of ‘large industry’ and MSMEs fell. The share of agriculture remains forever stuck at 12-13% since FY08 (since when the RBI data is available).

The annual data since FY08 reveals that personal loans, in absolute number or its share of credit to non-food, overtook large industry and services in FY20 and industry in FY21 (which continues in FY23).

Another characteristic in this period is a progressive fall in the credit share of industry and its component large industry; the share of services remains flat.

Growth in bank credit reveals another disturbing trend.

It fell drastically from the highs witnessed during FY09-FY14 (6 years) to new lows in the subsequent FY15-FY22 (8 years). The average growth 

• fell for non-food from 16.6% to 8.4%;

• fell for industry from 19.7% to 3.1%;

• fell for large industry from 22.3% to 2.3%;

• fell for services from 16% to 11% and

• fell from MSMEs from 11.9% to 6.6% from the first period to the second period.

The only shining star was personal loans, which grew from 11.7% to 15.8% in the corresponding periods.

Another significant change in the past three fiscals of FY20-FY21 (“new format” data of the RBI available from FY19) is that the credit to MSMEs jumped to the top at 16.9% growth, leaving personal loans (13.7%), agriculture (9.5%) and services (8.9%) behind. Credit to industry grew at 3.7%, largely pushed by MSMEs as large industry averaged 0.7% during this period. But in FY23 (April-November 2022), the credit growth to MSME was low at 5% (November over March 2022) and its share of non-food credit was flattening, pointing to a setback to MSME sector’s recovery.

What is pushing personal loans?

Analysis of personal loans shows, it is driven by (a) housing loans and (b) “other personal loans” – which includes health emergencies, which entails such “catastrophic” expenditure that 60 million Indians are pushed into poverty every year in normal times, as the Ayushman Bharat (PM-JAY) document of 2018 says. Other components of ‘other personal loans” include loans for wedding, home renovation, travel, festival and pension loans etc. for which no disaggregated data is available.

Disaggregated data for FY19-FY20 (“new format”) shows (i) housing loans constituted 50% of personal loans (ii) “other personal loans” 25% and (iii) vehicle loans 12.2%, credit card outstanding 4.3%, education loans and loans against FDs 2.8% each, gold loans 1.8% and consumer durables 0.6%.

The monthly trends in FY23 remain unchanged.

Luxury cars overtake low-end cars

Apart from credit growth, often recovery in sale of automobiles, particularly cars, is cited to claim a robust recovery from the pandemic. But just like credit outflows, car sales have inverted too.

The wholesale data released by the Society of Indian Automobile Manufacturers (SIAM) shows high-end and luxury cars overtook low-end or entry level cars in FY22 – by 22,122 units. In FY23 (April-December 2022), this gap widened to 1.7 lakh. This shows the income of only those at the top has gone up but not that of the rest who could aspire to entry-level cars.

The SIAM data further shows that from FY19 to FY22 the sale of (i) all automobiles (ii) including commercial vehicles and (iii) two-wheelers is steadily falling – pointing to worsening income and economic activity for a vast majority. If the sales of April-December 2022 are extrapolated for the full FY23, the sales of these would still remain below the FY19 level.

The only good news is that the sale of cars in full FY23 may surpass that of FY19. But this sale is led by mid-level, higher priced and luxury cars, not low-end cars – a pointer to discretionary consumption by those at the top. This is precisely what a survey by the UBS Securities India had said in October 2022: Consumption is driven by the top 20% of Indians – 59% in rural areas and 66% in urban areas – as the majority of them are yet to recover from the pandemic shock.

Low-middle income trap

There are three significant takeaways from the above.

One, higher credit outflows to agriculture, industry and services means production of more goods and services in the economy, while that of personal loans reflect more consumption expenditure (discretionary or emergencies like health expenditure), which doesn’t produce any goods and services. Given that the industrial production (IIP) fell to 26-month low of -4% in October 2022, the festival month when it should have made record sales for the fiscal and capacity utilization (CU) of manufacturing units fell from 75% in Q4 of FY22 to 72.4% in Q1 of FY23 (the last data available), there is no reason to believe consumption is adding to production of goods and services in the economy. The IIP did bounce back in November 2022 to 7.1% to register a growth of 5.5% over April-November period of 2021. But this is because of the low-base effect and at 5.5% it remains below the GDP growth of 7% estimated for FY23 in the First Advance Estimate (AE1). Curiously, AE1 data for FY23 shows consumption expenditure (PFCE) continues to remain flat at 57% of the GDP since FY19.

So, what exactly is this high growth in personal loans doing?

Is it leading to more imports to sustain consumption (like buying luxury cars, for instance)? Imports have jumped despite high tariff barriers erected since 2014. During the first three quarters of FY23 (April-December 2022), imports jumped by 25.6% ($686.7 billion) over the corresponding previous year ($546.9 billion), doubling the trade deficits (from -$57 billion to -$118 billion) in the process.

Two, credit to agriculture and allied activities (includes priority sector lending certificates) continue to remain the lowest and stagnant at around 12-13% (of non-food credit) for the past 16 years between FY08 and FY23.

This is when agriculture is supporting disproportionately large population, more so after the massive distress migration of 2020. It has been providing more jobs than industry and services for more than seven decades and has seen a jump in recent years – from 44.1% in 2017-18 to 46.5% in 2020-21, as per the PLFS reports. This has happened because of job loss in manufacturing and services during this period.

A stagnant credit outflow to agriculture doesn’t augur well for the economy since it has played a big role in keeping the economy afloat during the pandemic FY21-FY22 and is estimated to outperform industry (3.5% growth against industry’s 2.4%) in FY23.

Three, a consumption-led growth – going by the credit outflow and car sales – will run out of steam sooner than later and keep India forever stuck in the low-middle income trap unless ‘real’ sectors of economy (agriculture, industry and services) pull credit offtakes.