India's credit market reflects K-shaped pattern, says Nomura report

Share of consumption loans is increasing, while share of asset-creating loans is falling

Subprime borrowers are primarily taking on consumption loans, while those better off are leveraging to buy assets, suggesting a K-shaped credit market in India, said Nomura in a report on Thursday.

 

Quoting the Reserve Bank of India’s (RBI) Financial Stability Report (FSR) released last week, Nomura highlighted in its own report that current household debt has risen to 43 per cent of GDP, up from just over 35 per cent in March 2020. The report also noted that "the share of consumption loans is increasing, while the share of asset-creating loans is falling."

 

In the FSR, the RBI cautioned that 11 per cent of borrowers originating personal loans under Rs 50,000 had an overdue personal loan, and over 60 per cent of them had availed of more than three loans during FY25 so far.

 

Additionally, nearly three-fifths of customers who availed of personal loans in Q2FY25 had more than three live loans at the time of origination.

 

According to Nomura, write-offs of unsecured retail credit have increased sharply, as have delinquency rates for the microfinance sector. While the gross non-performing assets (GNPA) ratio for banks is at a multi-year low of 2.6 per cent, the RBI’s stress tests indicate it could rise to 3 per cent by FY26 under the baseline scenario of robust growth and declining inflation.

 

The report also highlighted that India is in the midst of a cyclical slowdown, and this evidence of household balance sheet stress aligns with weak income growth and K-shaped urban consumption demand.

 

The RBI noted that borrowers with unsecured loans, such as credit cards and personal loans, who also have larger secured loans, risk triggering delinquencies in the secured loans if they default on the smaller ones. Default in any loan category results in other loans of the same borrower being treated as non-performing by the lending financial institution.

 

In addition, the RBI pointed out that the first default is mostly observed in unsecured advances. Among borrowers at risk of default, the risk of delinquency is trending higher among those who, in addition to a personal loan or credit card outstanding, have availed of other retail loans.