It’s not just India Inc which is under a mountain of debt. Indian retail customers, too, are rapidly shedding inhibitions towards taking loans. With the rampant spread of credit culture, the amount of total personal loans as a percentage of disposable income went up to 19.4 per cent in FY16, as opposed to 14.2 per cent in FY10.

Until the start of the millennium, households mostly believed in saving for big ticket expenses. Today, they would rather take a loan — be it a a microwave oven, an LCD TV, a car, house and even education. The huge discounts and offers being given by e-commerce firms and consumer product brands are supporting the trend.

The average Indian is paying around one-fifth of his or her monthly salary towards repaying debt. The phenomenon has been aided by the spread of microfinance institutions (MFIs) and self-help groups (SHGs) in rural India and easy EMI schemes for even consumer durables in urban areas.

The off-take of credit has been going up, thanks to rising disposable incomes, increasing consumerism and easier access to credit. Real estate and consumer durables have led the growth in credit, according to Arvind Singhal, Chairman and MD of consultancy firm Technopak.

“In the last few years, high value goods have been coming under attractive schemes. A lot of credit is being used for creating assets like household gadgets and appliances. Some credit is also being taken for education of children — both in India and abroad — and that should be seen more as an investment than debt,” he said.

LH Manjunath, Executive Director of microfinance institution SKDRDP, said the spread of MFIs in urban and semi-urban areas and SHGs in rural areas has created an opportunity for women to enter the financial sector. “They are now making decisions and taking loans, in sharp contrast to the situation some years back. This has led to an expansion in the number of people opting for credit,” he observed.

Some of the biggest loans are taken in the real estate and auto sectors. “About 70 per cent of cars are bought on EMIs. In the short term, the loan phenomenon may increase further due to demonetisation,” said Honda India’s Senior VP for Marketing and Sales, Jnaneswar Sen.

Technopak’s Singhal said the rising credit culture would have been a matter of concern had it been used for discretionary spending such as travel and vacations. “Then you are not creating any value and blowing up the money. Creating credit is not necessarily bad, especially in cases where it is also improving life,” he pointed out.

“It is asset-based credit and helping create more liquidity, which is good for the economy,” he added.

While living on loan seems to be gaining currency, there is little worry about payment defaults. There is an increasing level of credit discipline among rural people, said SKDRDP’s Manjunath.

“MFIs and SHGs work more on building capacity of the people and the loan given is not forgotten. There are weekly meetings with the MFI’s representative and a relationship is built, minimising the chances of default,” he explained.

The default rate is much lesser in consumer credit as against corporate credit, said Singhal. This is because a retail customer has to build his/her credit score, and multiple validation takes place before credit is extended. “A lot of assets are given on mortgage, reducing risks,” he added.

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