THE FLIP SIDE of being a consumption-driven economy is that it can land the financially in-disciplined in a mess. So, it's not surprising that cases of personal bankruptcy are slowly rising even as India reaps the benefit of a demographic dividend. But let's first look at the big picture. The country's lending book stood at ₹174 lakh crore as of March 2022, with retail loans contributing 48.9%. The growth in retail loans since FY20 has been fast and furious, just a shade (48.9%) below commercial loans (49.5%), with the remainder (1.6%) contributed by microfinance, according to credit bureau CRIF High Mark. This is despite 480 million adult Indians till the age of 65 — representing half the country's earning population — being 'credit unserved', as per credit information company Cibil.

For a banker, the numbers can be heartening, but are nonetheless disquieting. According to a study by Equifax and Andromeda, the number of active personal loans surged from 3.5 crore as of March 2020 to six crore by March 2022. Personal loans stood at ₹40.13 lakh crore as on February 24, 2023. Housing loan is the biggest chunk of the personal loan category at ₹19.11 lakh crore, followed by "other personal loans" at ₹10.79 lakh crore and vehicle loans at ₹4.96 lakh crore. Between FY19 and FY23, these three loan categories have grown by over 65% (₹11.59 lakh crore in FY19), 85% (₹5.83 lakh crore in FY19) and 125% (₹2.2 lakh crore in FY19), respectively. Interestingly, there is no break-up of "other personal loans," which are, usually, taken for travel, home renovation, wedding, medical emergency, festival, and come at higher interest rates.

What is fuelling retail credit growth is the onboarding of new-to-credit (NTC) consumers. For instance, according to TransUnion, a credit information and insights company, 35 million Indians bought their first credit product in 2021, while another 31 million were NTC consumers in the nine months of 2022. A majority (42%) of these consumers were millennials (born between 1980 and 1994), followed by Gen Z (born between 1995 and later) at 29%. But what should be a matter of concern is that these NTC consumers are concentrated (67%) in rural and semi-urban areas where the annual income is ₹40,925 (measured as per capita net value added), half that of urban income (₹98,435).

The study found that durables loans was, generally, the first credit product accessed by most first-time borrowers, followed by agricultural loans (16%) and personal loans (13%). The study also found that new expenses were the primary driver for 75% NTC consumers. But what is worrisome is that 79% of these borrowers had to apply several times before they got access to a credit product, either because of lack of credit history or poor credit scores. But the appetite for credit is immense — 79% NTC consumers were interested in additional credit products with one in two NTC consumers looking to widen their expenses with better credit offers.

"A first-time (NTC) borrower invariably ends up paying a higher interest rate. This makes the segment very vulnerable to defaults. Hence, there should be greater caution among borrowers, especially early millennials and Gen Z, across geographies," says Ritesh Srivastava, founder & CEO, Freed, a debt relief platform.

As per a report by OneScore, a credit score monitoring platform, the average credit score of nine million Indians stood at 715 in FY22. Most lenders look for a minimum credit score of 750 to approve loans or credit cards and this means that most borrowers are not financially savvy enough. In fact, the study states that a majority (63%) of consumers continue to have a mediocre score in the range of 300-747. This only validates the finding of TransUnion that 79% borrowers had to apply several times before accessing credit.

Incidentally, among personal loans, the fastest growing category of loans is credit cards, touching the ₹1.86 lakh crore mark with 8.25 crore cards outstanding. This is a strong rebound from the pandemic low of ₹20,765 crore as of April 2020 and ₹1.20 lakh crore as of March 2020. In fact, since FY13, the growth in credit card outstanding has seen the highest jump — more than seven-fold — from ₹25,000 crore. The jump in usage is being attributed to a spurt in the use of cards (60%) for making online utility bill payments besides spending on hospitality, travel/leisure, healthcare, education, consumer durables and e-commerce.

While data on non-performing assets in the personal loan category is not available, a glimpse into Freed's numbers show that millennials are falling into a debt trap. Srivastava mentions that the young ones are the most vulnerable. "The average age (of our customer) has come down from 31 to 30 over the past 12 months," says Srivastava. What is also revealing is the intensity of the bankruptcy. The average debt per enrolled customer on the Freed platform is ₹5.22 lakh, across 4.2 creditor accounts. In fact, the number of creditor accounts per borrower, too, has gone up from 3.8 to 4.2 in the past 12 months.

With corporate India on a deleveraging spree, bankers are pushing aggressively for retail credit. In fact, a recent Reserve Bank of India report had red-flagged the trend by stating that banks appear to have displayed "herding behaviour" in diverting loans away from industry towards retail. "Such build-up of concentration in retail loans could become a source of systemic risk," warned the central bank.

Emerging out of a debt trap is not easy, According to Freed, only 886 customers have managed to turn debt-free, while 2,194 are partially debt-free. The average settlement rate is 44.3%, with the customer saving 55.7%. However, the exercise impacts credit scores with the graduated borrower fetching average credit score of 708, though an improvement from the average score of 637 while enrolling on the platform. Srivastava, however, advises millennials to be very careful while borrowing. "If not, there is a greater chance of them falling prey to high-cost debt and getting caught in a vicious debt trap," says Srivastava.

In other words, think twice before you swipe.

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