India’s low household debt-to-GDP ratio of 17 per cent and a growing demand for housing, vehicles and personal loans augurs well for banks and housing finance companies. The fact that the country’s GDP is growing at over 7 per cent, among the highest in the world, is another positive.
Experts say that at a time when the credit growth to the industrial sector has turned out to be a risky proposition for banks and is on a declining trajectory, it is the credit demand from households that will drive growth for the sector in the near future. The prevailing low interest rate environment along with the subsidy offered by the government for the affordable housing will only push up the demand for housing.
“The overall credit growth for the banking sector in FY17 stood at around 5 per cent and the only segment that saw higher credit demand was the personal loan category. Banks have realised that retail segment will drive growth and even though the cost for the banks rise because of the small ticket size of such loans, there is less impact they have on balance sheet on account of the non-performing loans,” said D K Pant, chief economist, India Ratings.
He argued that while there is a growing demand for housing, ownership of vehicles and white goods in the country and thereby a potential for growth in the retail loan segment, “in order to capitalise on the latent demand, more people need to come in the job cycle and the per capita income has to grow.”
While loan growth in the retail segment is expected to drive the growth for banks, a bank analyst said that banks and NBFCs (non-banking finance companies) having greater focus on retail will score over others and investors need to identify such banks to capitalise on their future growth. “Housing finance companies have registered more than 20 per cent growth last year and they will continue to see higher growth rates because of the rising demand for housing across the country,” he said.
This not only represents a good investment opportunity for financial investors but also for home buyers, as they will be buying into the housing asset at the lower end of interest rate cycle. The fact that property prices have fallen in some pockets, or generally not risen over the past couple of years, presents a good entry point for investors as well as end-users. Despite the reduction in interest rates, stocks of companies such as HDFC, LIC Housing Finance, DHFL have remained steady or even risen over the past 2-3 months.
Even as the quantum of household debt has increased over the years, it remains low as a proportion of the gross domestic product (GDP). Household debt comprises home, vehicle, education loans and credit cards. Home loans comprise the largest chunk of 53 per cent of total household loans. As per an analysis by Credit Suisse, presented in the report of the government-appointed committee to review the fiscal responsibility laws, the distribution of debt in India is more skewed towards the corporate sector.
Household debt in India lags both emerging countries as well as developed economies. It accounts for around 17 per cent of total bank credit and 23 per cent, if one includes NBFCs and retail share of agriculture loans. Share of household debt in other countries is higher, at 24 per cent for emerging countries and 47 per cent for advanced countries. Banks and NBFCs account for the majority of loans to the household sector in India. This reflects that there is tremendous scope for growth as far as household debt is concerned.
As banking sector penetration takes place, more people are expected to make use of the formal sources of finance to purchase homes, vehicles and to study via education loans. While household debt from the banking sector has increased to Rs 14 lakh crore in 2015-16 from just under Rs 6 lakh crore in 2008-09, share of household debt to GDP has remained largely flat over the past 5-6 years at 10 per cent of the GDP, the report said.
However, if NBFC loans to consumer sector and retail’s share of the agriculture loans is included, the proportion of household debt to GDP reaches 19 per cent. Even including these two, penetration is still significantly lower compared to other countries, with consumer debt to GDP at around 35 per cent for emerging countries and 75 per cent for advances economies.
In contrast, the corporate debt to GDP ratio is around 65 per cent. Total bank credit in India is Rs 67 lakh crore, which rises to Rs 87 lakh crore if other corporate loans from NBFCs, bonds, commercial papers and external commercial borrowings are included.
Analysts note that quantum and proportion of household debt would go up as lower interest rates spur credit demand for purchase of homes and cars. Interest rates have come down by over 100 basis points in the past couple of months after demonetisation of Rs 500 and Rs 1,000 notes, which resulted in 86 per cent of the currency being withdrawn from circulation. This led to banks being flush with huge deposits.
While the growth in corporate sector loans has tapered down, retail growth has remained strong over the years, with scope for further expansion in the future. “Retail loan growth has been relatively strong over the past few years, growing at more than 15 per cent year-on-year. With push towards financial inclusion and increased digitisation, we could continue to see strong growth in household debt over the next 5-10 years,” Credit Suisse said in its inputs presented in the FRBM panel’s four-volume report.