There is strong merit in growing household credit as it has positive effects on consumption and hence GDP growth, Bank of Baroda’s economic research department said in a report.

Given the higher ratios for the developed countries, there is plenty of scope to augment this segment of credit by banks, per the report.

“But also it is imperative that there are no disruptions in terms of asset quality as such shocks can push the system back.

“This is how the recent RBI move (increase in risk weights on certain segments of consumer credit by banks and NBFCs as well as bank credit to NBFCs) can be viewed as it brings in growth with discipline,” Dipanwita Mazumdar, Economist, BoB, said.

Among major G20 economies, India stands at 10th position in terms of household credit to GDP ratio.

An immediate conclusion is that logically, economies with a larger size of GDP have a higher ratio. India has a household credit to GDP ratio of 40.3 per cent, which is lower than major advanced economies such as US with ratio of 73.7 per cent, United Kingdom with ratio of 80.7 per cent, Germany at 53.5 per cent and Japan at 67.5 per cent, as per Mazumdar’s assessment.

In comparison to major EMs (emerging markets) however, India’s ratio is impressive. In pecking order it is only next to South Korea and China.

“Thus compared to the median level of credit to GDP ratio of households of EMs (21.8 per cent), India outperforms the others.

“In fact, India’s ratio overtakes South Africa, Indonesia, Russia, amongst others, reflecting thus a developed credit market,” opined the BoB economist.

The credit to GDP ratio of Indian households has picked up considerably compared to pre-Covid times. From a ratio of 34.5 per cent in March 2019, it has risen to 40.3 per cent in June 2023.

“This is more due to structural phenomenon such as pick up discretionary spending, favourable demographic and rising aspirations of middle class,” Mazumdar said.

Absolute terms

The BoB economist emphasised that in absolute terms as well, India’s household credit figure is reflective of the fact that households have increased borrowing in tune with rising consumption demand.

In absolute terms, household credit has grown at a compounded annual growth rate of 11 per cent from ₹17-lakh crore in 2010 to Rs ₹112-lakh crore in June 2023.

The results of BoB’s exercise, where household consumption is regressed to household credit, shows that over the years, credit has emerged as an important contributor in fuelling private consumption demand across countries, which is positive for growth.

“It can hence be said that under the umbrella of prudent regulation, quality consumer credit can actually be a driver of economic growth,”Mazumdar said.

Examination of the relationship between household savings and household credit shows that the 10-year CAGR of household savings of major economies declined, while credit offtake by households has picked up pace.

“Generally, the gradual run down of savings has resulted in increased borrowings. For India, the 10-year CAGR in gross household savings has been 8.4 per cent with gross financial savings increasing by 10.8 per cent and physical assets by 7.1 per cent,” per the report.