Opinion - Editorials

CONSUMER CREDIT: BOON OR BANE?

THERE ARE TWO ways of looking at the ongoing boom in consumer credit disbursements by commercial banks in India. At one level it has brought about a number of benefits to consumers, many of whom (especially from the growing middle class) have gone on to buy cars, motorbikes or consumer durables such as refrigerators by pledging their future savings. The traditional conservative mindset has been broken and borrowing against future income is now a widespread phenomenon in India, releasing the pent up demand for various types of consumer goods. Commercial banks have joined non-banking finance companies in dispensing consumer finance. The Indian consumer can choose from a mind-boggling array of financing schemes offered by a large number of banks and other financial institutions. The explosive growth in the availability of consumer finance has matched the supply of products in India. Nowhere else is this in greater evidence than in the Indian passenger car industry. Late to mature in India, the fast-growing automobile industry has, since the mid-1990s, been giving Indian consumers a meaningful choice of cars across different price points and models. No one disputes the fact that an exponential growth in the availability of car loans has made it more likely for a middle class consumer to graduate from a scooter to a car. The automobile industry's experience has been replicated in other industries such as television and even personal computers.

Economists perceive other benefits from the increased availability of retail loans. The demand side stimulus to the economy has created jobs — the automobile industry is again a case in point — and has added significantly to recent economic growth. For the financial sector, there have been several gains. Retail lending has become the most spectacular innovation in the commercial banking sector in recent years. As commercial banks shifted their focus from traditional need-based lending to a broad-based portfolio, retail lending has become a mainstream business and an important contributor to their profitability. On March 31, 2004 the retail portfolio of commercial banks constituted 21.5 per cent of their total outstanding advances, sharply higher than the 12.5 per cent in the previous year. Including loans to the housing sector, banks had lent more than Rs.1,89,000 crore by way of consumer loans up to the end of last year. The rapid absorption of technology by banks has reduced their transaction costs and helped them deliver a wide range of retail loan products efficiently.

The flip side is that the retail loan surge will accentuate the indebtedness of households. Various studies show that this might have already happened. Credit card defaults are on the increase. Over the medium to long term, this could have negative implications for the sustainability of private consumption and domestic savings. For banks, the newfound preference for the retail sector might mean a shift away from their more traditional lending activities that create productive assets. That in turn has major implications for economic growth. Being essentially confined to the urban and metropolitan areas, retail lending can hardly be considered a suitable conduit for broad-based economic development. Moreover, banks might have expanded too fast into sectors where they have little experience. Although their track record so far is good, there are signs that their asset quality has begun to deteriorate in the wake of macro-economic developments such as an interest rate increase. Viewed from any standpoint, whether of Indian consumers, banks or the economy, the present surge in consumer loans is not an unmixed blessing.

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