Explore why youths are drowning in unsecured loans and how it reshapes the financial landscape.
You must have heard your parents saying, “ Zamana badal gaya hai! ”. And indeed, it’s true.
If you recall, our parents come from a time when they believed that debt, or ‘ karza ’, was a curse. In contrast, today’s youth often indulge in every luxury using a modern and fancy approach – credit cards and Buy Now, Pay Later (BNPL) schemes.
This shift in behaviour has led to a record-high credit card outstanding amount in India, reaching a staggering Rs 2.10 lakh crore in March 2023, compared to Rs 1.64 lakh crore in March 2022. This represents a 28% increase, as reported by a data shared in Parliament and cited by Business Today.
But that is not the whole story. There is more to it. Credit card payment defaults have also seen a rise in June 2023.
So, who are these borrowers, and what’s the problem?
Let’s uncover the details.
A report from Business Today has unveiled an interesting trend – a significant 40% of the demand for retail loans is being fueled by younger customers aged between 18 and 30 years. Simultaneously, there has been a substantial surge in retail loans.
Not long ago, the Deputy Governor of the Supervision Department of the Reserve Bank of India (RBI), J Swaminathan, also issued a warning. He said that unsecured retail loans have been growing by an average of 33% over the past couple of years, as reported by the Economic Times.
So, the situation is such that household savings are at a 50-year low while retail unsecured loans are reaching new highs.
Why is the Retail – Unsecured Lending Rising?
In the financial year 2015, banks predominantly focused on providing 43.55% of their loans to industries, while personal loans received a smaller share of just 19.11%. However, as the years passed, the industrial loan segment’s non-performing assets (NPAs) started to rise, causing bank losses. In response, they shifted their focus toward personal loans.
By the middle of the financial year 2020-2021, the allocation of personal and industrial loans had become nearly equal. Since then, the share allocated to personal loans has continued to grow, while the allocation for industrial loans has decreased significantly.
You can see that in the chart below.
The chart shows how banks have prioritised personal loans over industrial loans.
In the financial year 2023, the total credit share for personal loans has increased to 29.87%, whereas industrial loans have reduced to 24.4%, as reported by Business Today.
Taking a broader perspective, data from 12 large Non-Banking Financial Companies (NBFCs), compiled by India Ratings, reveals that unsecured loans now make up a substantial 30% of their total assets under management, as reported by Mint. This indicates a notable shift in the composition of their loan portfolios towards unsecured lending.
Why is India’s Youth Struggling with Unsecured Debt?
The youth in India are grappling with unsecured debt for several reasons:
1. Miniaturisation of Credit: Fintech companies are making it easier for young individuals to access smaller loans, some as low as Rs 25,000. This accessibility tempts them to take on debt for various purposes, including lifestyle expenses and emergencies. Moreover, the EMI system has added the required shine.
2. Easy Access to Unsecured Loans: The ease of obtaining unsecured loans, especially small-ticket loans and credit cards, is a significant factor. These financial products require minimal documentation and are readily available to young borrowers who might not have substantial credit histories.
3. Expensive Lifestyles: Many of today’s youth aspire to modern lifestyles, which often come with significant expenses that may exceed their income. The desire to keep up with peers and societal expectations can lead to overspending and reliance on credit.
4. Delinquency Rates: Delinquency rates for credit cards have been on the rise, indicating that many borrowers are struggling to manage their credit card debts effectively. According to Business Today, delinquency rates for credit cards rose by 2.9% in June 2023.
Rise of a New Industry
The surge in retail unsecured loans has given rise to a new industry – Retail Debt Resolution companies. These firms specialise in assisting individuals in managing and resolving their debt-related challenges. They provide services such as debt consolidation, negotiating with creditors, and financial counselling to help borrowers regain control of their finances.
Moving forward, it is essential to strike a delicate balance between the lending and borrowing practice.
Lenders must be cautious when granting loans and must do proper Know Your Customer (KYC) documentation and credit bureau checks. On the other hand, borrowers, mainly youths, must borrow wisely and avoid overextending themselves.
By navigating this path carefully, India’s digital revolution can continue to be a symbol of progress and not evolve into a debt-centric economy.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information purposes only. This is not an investment advice.