Credit is a devil that dances in empty pockets," was the advice P.V. Rajiv's father gave him when the young salesman swiped his new credit card for the first time to buy an expensive watch he could hardly afford. As someone whose generation was brought up on the virtue of thrift, Rajiv's father did not understand the culture of unfettered consumerism that has been one of the engines of India's stunning economic growth.
If Rajiv couldn't pay up front for a purchase, he used his card, until he exhausted his credit limit about six months ago. "The outstanding is so high now that I am hardly able to pay the minimum due," said the 26-year-old, once the quintessential ambitious customer every bank targeted, hoping the offer of a credit card or loan for that dream car would prove irresistible.
With India's growth, an average of 8.6 percent in the last four years, matched only by an expansive embrace of debt-fuelled consumerism among its growing middle-class, the country was a magnet for retail lenders. But now as the global slowdown hobbles India's growth, while interest rates are still high, banks, companies and consumers are feeling the strain of rising debt.
According to latest central bank data, consumer credit growth in August slowed to 17.4 percent from 21.4 percent a year ago. Housing loan growth slowed to 13.9 percent in August from 17 percent last year, while advances for consumer durables fell by 7.9 percent from a year ago. Car sales, a major indicator of the economy's health, fell an annual 6.6 percent in October, the third decline in four months.
"There has been significant moderation in retail credit disbursal," Abheek Barua, chief economist of HDFC Bank, India's second largest private bank, said. "Consumer credit has fallen in the past 6-7 months because of very high rates and with banks becoming more careful about any spike in non-performing assests."
PAYING FOR PAST EXCESS Just a year ago things were very different. According to Goldman Sachs, Indian consumers' growing appetite for cars, computers or clothes during the past eight years accounted for nearly as much growth in global demand as the United States, and triggered huge demand for credit. Total loans, including mortgages and unsecured loans such as credit cards, grew around 30 percent annually in the last three years, an expansion the central bank called "unprecedented".
But now the strain of the global slowdown is reflected in most banks raising their loan-loss provision, while overextended Indians find themselves in the whirl of revolving credit. The largest among Indian private banks, ICICI, a major player in consumer credit markets, raised its bad loans provision to 1.91 percent of net advances from 1.43 percent a year ago. Retail credit is the biggest contributor to its bad loans.
According to ratings agency Crisil, a unit of Standard & Poor's, Indian banks' consumer loans are now likely to be major risk areas as bad debts are expected to rise to four percent of advances by 2009. Outstanding loans on credit cards stood at about $6 billion at the end of August, up a staggering 86 percent from a year ago.
NO CHECKS, LITTLE SECURITY Until about two decades ago a father would raise a loan from friends and family or take an advance from his retirement benefits to marry off a daughter or buy a house. But as the economy opened up, credit providers distributed loans indiscriminately with little care for the credit-worthiness of the debtors -- it became common to be accosted by credit card agents or offered a loan with virtually no demand for a security.
"If you produce your plane boarding pass, you might be able to obtain a credit card as you exit the airport terminal," Manmohan Agrawal, executive director of Axis Bank, said in a Wharton School business report last year.