Personal loans have become a cause of worry; here’s why

The Central Statistical Office (CSO) and some other experts have recently asserted that the large “discrepancies” in the expenditure-side GDP estimates are because of inadequate data and are statistically unbiased. These discrepancies were there in the past as well; over time, as more data became available, these got rectified or minimised. Further, such inconsistencies are not specific to India’s national accounts but a fairly common feature across countries; India is no outlier in this regard. So, when the statistical authorities have been transparent all along, we should have no misgivings.

But at another level, does transparency help us analyse India’s current macroeconomic data any better? Not really. Maintaining that the demand-side discrepancies are solely explained by inadequate data on expenditures is perhaps stretching the argument because these are residuals benchmarked to the production-side estimates; the latter themselves are under scrutiny for being overestimated. The concerns of critics could therefore be legitimate and cannot easily be brushed aside.

Think about the fact that if the expenditure-side GDP data, especially at quarterly frequency, are no good, then how certain are we in inferring that the current phase of GDP growth is consumption-driven? What if in the future, a large share of the discrepancies were apportioned to investment instead? Analysing such macro data therefore, can at best be tentative, both in its direction and magnitude. Reason enough why analysts seek buttressing evidence from many other high frequency indicators. The suspicion persists because not a single such indicator has aligned consistently with the national accounts’ narrative of accelerated value addition and growth in the last three years.

The worry is that the quarterly GDP estimates, an early indicator of the business cycle position, could gradually lose credibility as more analysts begin constructing Indian counterparts of the Li Keqiang index–pushing decision-taking by key agents into highly uncertain territory. The probability of policy error on the part of the government and RBI could compound. Boardrooms of businesses could turn to solving demand puzzles, delaying investment decisions. And bankers could end up making wrong and risky resource allocations!

The intention of this article is to flag one such issue: Concern about rising personal loans. Discretionary consumer spending is the current buzz; accelerating production of consumer durable goods in the general index (IIP) is a sure green shoot; and rising personal loans in credit portfolios of most commercial banks is settled evidence to support the proposition of a consumption-led, cyclical recovery. What then is there to worry?

Pose here a question: Is this trend sustainable? Is this based upon fundamentals of rising real incomes of consumers or merely bank-led in anticipation of a future? Deliberate these observations in recent months: bike sales suddenly picked up into double-digit territory, when the expected monsoon rains are yet to shower in any good measure; and large numbers of cars purchased by government employees even as the Seventh Pay Commission award is yet to be implemented. What is to be inferred from this?

Banks, both public and private, have been under tremendous pressure to grow their assets when they are either shy of lending to industry, or have seen very little loan demand. In such an environment, it is not surprising they are only too keen to lend to households. Hence, their personal loan portfolio has grown sharply; while nominal growth is touching 20% year-on-year, the inflation-adjusted growth in personal loans is trending at 14%, a historical peak.

Think of the contrast–credit to industry at decade-lows, credit to households at decade-highs! Is there a herd behavior, everyone rushing in, hoping for a safe bet? From the banks’ standpoint, there should be very little reason to worry; their assessment of incomes could be consistent with the national accounts’ narrative of consumption-led growth. When incomes are rising but investment remains subdued, it is but logical by the national income identity that consumption must have been growing, boosted by real purchasing power of consumers due to sharply falling inflation. How comfortable can we be with such an assessment?

While the confidence is attributable to GDP acceleration, the growth in value added has slowed–the difference owing to increases in net indirect taxes accruing to the government. And at a finer level, growth in nominal disposable personal income (ie income net of direct taxes) has been trending down. By an aggressive push to personal loans, have banks stretched household balance sheets and exposed themselves to further default risks? Is the growth in credit card outstandings an early signal? The worry should be that historically, India hasn’t ever witnessed such high growth in real personal loans, even in the heydays of rapid economic growth between 2003 through 2011.

The answer could therefore depend upon the uncertainties around assessments of demand conditions. Specifically, what if growth had been much slower than estimated? There could be several reasons why criticisms have some merit that needn’t be ignored: say for example, how readily is the estimated buoyancy in manufacturing value added growth explained by higher corporate profit margins from lower input prices relative to output prices even when volume growth remains muted? Hasn’t that also been true for other commodity importing countries including China, where the manufacturing share in GDP is so much higher?

Even conceding that India has specific advantages in creating large value additions by a million hitherto unmarked small firms, how did this additional demand dissipate? If it wasn’t spent on buying goods, which is what the weakening IIP and non-oil, non-gold imports point to, then it must be spent on purchase of services, pushing up their prices, which is what retail services’ inflation suggests. Then why deflate services’ activities like trade and finance with wholesale price indices, when consumer prices appear closer to producer prices of services? Can past practices justify such an inconsistency when the whole exercise was to switch over to modern national accounts compilation methods? Indeed, if one were to deflate these components with CPI inflation, growth estimates could slow down, raising questions about assessment of demand conditions.

Surely then the expectations that household real incomes will continue to grow, delinked from weaker balance-sheets of the private corporate sector, be suspect? If banks continue to expand personal loans, they could end-up stretching household balance sheets into vulnerable limits no sooner. It is to be hoped that bank branches are exercising abundant discretion in assessing creditworthiness of individual borrowers, and not letting down their guard in the effort to meet targets set by respective boards. Moreover, such growth is too brisk for any regulatory comfort; one expects this has not escaped RBI’s eagle eye. The economy could hardly afford to damage its household balance sheets when a large section of corporate balance sheets remain stressed and unrepaired.

The author is a New Delhi-based economist