Households’ balance sheet stress is also K-shaped: Nomura

With the Reserve Bank of India’s (RBI) latest Financial Stability Report taking cognisance of increasing stress levels in retail loans, especially among unsecured creditors, Nomura economists on Thursday remarked that household stress in India has also turned K-shaped, with the rise in retail debt driven by consumption loans while asset-creating loans have a shrinking share.

Current household debt has risen to about 43% of GDP from a tad over 35% of GDP in March 2020, Nomura’s economists Sonal Varma and Aurodeep Nandi said in a note, adding that the RBI has flagged the increasing household balance sheet stress.

“Subprime borrowers are primarily taking on consumption loans, while those better off are taking on leverage to buy assets, which suggests a K-shaped credit market. Approximately 60% of those taking on personal loans had more than three live loans. That said, the RBI’s macroprudential tightening has led to a decline in retail credit growth,” they pointed out.

“Write-offs of unsecured retail credit have increased sharply, as have delinquency rates for the microfinance sector. While the GNPA [Gross non-performing assets] ratio for banks is at a multi-year low of 2.6%, the RBI’s stress tests indicate it could rise to 3% by 2025-26 in the baseline scenario of robust growth and declining inflation,” the Nomura note said.

Nomura has reiterated that India is in the midst of a cyclical slowdown, and this “evidence of household balance sheet stress chimes with weak income and K-shaped” urban consumption demand. “We expect GDP growth to remain weak at 6% year-on-year in 2024-25 and 5.9% in 2025-26,” they concluded.