Are credit cards fiscally degradable?

A new generation of Indians is powering credit card spending that has doubled on average since the pandemic. Banks are feeding this appetite by pushing credit to consumers who are helping India spend its way out of the lockdowns. Technology startups, on their part, are changing consumption patterns and making the economy less dependent on cash. The Reserve Bank of India (RBI) is watching banks’ runaway growth in retail lending. It does not, however, find the situation alarming because of the low indebtedness of households and their improving credit profile. Yet, the central bank is cautious, urging banks to be vigilant about unsecured consumer credit that could sow seeds of vulnerability.

The banking regulator has reason to be concerned about the narrowness of credit revival with corporate borrowing yet to pick up steam. This is diverting an unusual amount of bank lending to consumers. There are early signs of stress building up in retail lending, although the metrics for the segment are healthier than for overall bank advances. Credit scores are improving, which allows banks to push unsecured debt through instruments like cards. Plastic money is also becoming more acceptable in newer service segments such as education and rents. This places credit cards outstanding among the fastest-growing components of borrowing by households, only that the segments growing faster, like loans against fixed deposits and loans for consumer durables, are a relatively safe play for banks.

Borrowing by consumers is a precursor to a resurgence of corporate credit as capacity utilisation improves. This could add to pressure on interest rates while inflation remains sticky. Both factors affect consumer credit through borrowing costs and savings. Consumers could find it difficult to keep up this borrowing pace and some moderation would be welcome to the central bank and the government. Household and government indebtedness is climbing as producers deleverage. The scenario may not be ideal for sustaining class-leading economic growth.