Economic Highlights

New Delhi, 9 October 2023

RBI Subprime Alert

PERSONAL LOANS, DEFAULTS RISE!

By Shivaji Sarkar 

What would sway Indian politics --the Reserve Bank of India’s monetary policy or caste census? Normally it should be the RBI moves, but elections may be guided more by the caste factor as people forget that for decades castes have been denoting socio-economic status, aspirations rather than wry warnings of one who observes the economy from close quarters. 

The RBI has come out with certain facts that may not be palatable to the overall economic conditions, including a veiled subprime alert as personal loans and defaults rise. It held back repo rates at 6.5 percent amid continuous rises in prices. The bank indicates holding of rates till the general elections. In other words, it candidly says that there is little opportunity to cut the rates. This means the cost would continue to be more for the borrowers, whether individual or corporate.  

Do Bihar caste census figures matter in such a scenario? Inflation at 6.83 percent as per August 2023 figures less than the highest of 7.44 percent in July is beyond the RBI toleration limit of 6 percent. But hawkish RBI is targeting for 4 percent. It is good news if the target is achieved but if not, post elections rates could spiral. The 112 extreme backward castes and other economically weaker classes, who are covered by the Ujjwala gas schemes may feel happy that the government has reduced the LPG cylinder prices by Rs 300. 

Correspondingly, the price of commercial cylinders has been raised by Rs 300. It is a cross subsidy. The gas companies lose nothing but cost of production on a number of items to goes up. It will jack up the prices and overall cost of living. The subsidy on the gas would be substituted by higher realisations from the market. Technically it may keep oil companies’ coffers balanced but the market costs can upset the RBI’s calculations. It can make markets tizzy as RBI’s future inflation projection at 5.2 percent may be off the mark. 

The reaction of the weaker sections may not be easy to predict. Happiness and hardship quotients are not equally balanced. In such situations they may take decisions as per caste conglomerations, which is difficult to predict politically. It can stoke many speculations and make the work of psephologists difficult. 

Though the RBI moves still may not be exactly on the poll plank, but these may ultimately impact the course. However, the cushion RBI has provided edges out to almost eight months, far beyond the five State elections that are to close in December. Next monetary policy moves may be more critical.  

The situation is contrary to the United States. The Federal Reserve has been firming up rates. Another rise may be in the offing as the US jobs swelled, unemployment rate comes down to 3.8 percent and wages rose at a modest rate. It is not a good indicator for the Indian economy. Each US rate surge sees flight of capital from the rest of the world. This means investments elsewhere would plummet. India needs to feel concerned. 

The RBI finds that already its government bonds, G-Sec, security sales are in over supply and the 10-year-bonds get low returns. The central bank says it is limiting operations to manage liquidity and not yield. Practically, the yield differential between the US and G-Secs have fallen to low levels. This could have a negative impact on the strength of the rupee-dollar exchange rate. It is already at a low of Rs 83.25 to the dollar. The bank’s open market operation (OMO) bond prices are falling even as US 20-year bonds are firming. Managing the currency rates itself is becoming tough. 

The housing sector has seen hopes in rate hold and that more units could be sold. That is not a solace for RBI Governor Shaktikant Das. He is concerned over “certain components of personal loans recording very high growth. These are being closely monitored for signs of incipient stress”. 

On annual basis personal loans contributed 37.7 percent incremental bank credit in August 2023, according to the Monetary Policy Committee (MPC) report or over Rs 40 lakh crore against Rs 33 lakh crore in 2022 and Rs 29 lakh crore in 2021. Within these loans during August, credit card loans had shown a growth of 30 percent, vehicle loans 21percent and housing loans 14 percent. 

Retail loans in the Indian banking sector grew at a compounded annual growth rate (CAGR) of 24.8 percent between March 2021 and March 2023, the RBI said in its Financial Stability Report in June. It far outstripped the 13.8 percent CAGR of banks’ gross advances and the retail segment accounted for one-third of the gross loans in the banking system. 

The share of unsecured retail loans grew to 25.2 percent from 22.9 percent in March 2021-2023, while secured loans eased from 77.1 percent to 74.8 percent, the data showed. Banks’ unsecured loan portfolio amounted to close to Rs 12 lakh crore as of end July. In an August 29 report, Nomura Global Market Research’s analysts say that while most lead indicators do not flag imminent risks for banks, the regulator’s “repeated warnings” on unabated growth in the segment as well as concerns on rising consumer leverage have sparked investor concerns. The RBI goes by the world experience of 2007-08 sub-prime meltdown. However, Das has not said a word about a possibility of repeat of a meltdown. 

A trend in higher default in this segment is noticed. The number of unsecured loans payment defaulters in India, on the other hand, has increased to 32.9 percent in the personal loans segment as of April 21, 2023, compared with 31.4 percent from a year ago.   

Banks report 16044 borrowers with total debt of Rs 346,479 crore. The amount stuck in the wilful default category has jumped by 41 per cent, or over Rs 1 lakh crore in the last two years from Rs 245,767 crore in December 2020, according to data compiled by Transunion Cibil. 

There is speculation that the caste census would lead to rise in demand for loan waivers. But the microfinance industry says that their borrowers know that debt waiver announcements would not add to default and escalation in credit cost. The only way to have done it is politically-- by state or other governments. Rates are to hold till May 2024, but the rising personal debts and defaults are ominous signs that nudge the RBI.---INFA 

(Copyright, India News & Feature Alliance)