Indian Middle Class Gets Caught In The Whirlwind Of Credit
The consumerism that has helped drive India's surging economy in recent years is showing its dark side, as overextended Indian credit-card holders get their first taste of delinquency and deep debt.
With India's economic growth ebbing amid the global slowdown, but interest rates still high, the banks that backed the plastic are feeling the squeeze as well. On Monday, ICICI Bank, India's largest private bank by assets, announced a flat quarterly profit and higher loan-loss provisions.
But the most visible stress is on the cardholders, and it's showing up in headlines, in call-center employees under crushing debt, even in a new Bollywood movie about middle-class people struggling with credit.
Consumer credit, whether cards or car loans, is relatively new to India. Fifteen years ago, even home loans were hard to come by. As regulations on lending were relaxed and India's urban middle class swelled with 20-somethings hungry for the latest cellphone model, credit expanded to meet the need.
Banks went too far, analysts say, issuing cards indiscriminately to people in rural areas and lower-income groups without regular salaries. The number of credit cards in India, while still only a fraction of the population, has more than tripled in the past five years, to almost 30 million. In the year ended March 31, Indians charged more than $14 billion on their cards, more than three times the amount charged four years earlier.
The amount of unsecured loans and credit-card receivables more than three months overdue is about 7% to 9% of total loans outstanding this year, and is about to head as high as 15%, according to ratings agency Crisil Ltd. in Mumbai.
More people are turning up desperate for help with their credit card payments, says V.N. Kulkarni, chief counselor at Mumbai's Abhay Credit Counseling Center, which advises borrowers. Hundreds have been lining up at the center, dumbfounded by their debt and asking the most basic questions.
'They are unaware of the charges, unaware of the interest rates,' Mr. Kulkarni says. 'They just take the money because it is freely available.'
Last year was a sort of 'annus horribilis, because credit standards got diluted,' says Seshadri Sen, banking analyst at Macquarie Securities in Mumbai.
For some, the problems are overwhelming. When police broke down the door of the Nair family's suburban apartment here earlier this month, they found four bodies and 73 credit cards. Burdened with too much debt, the Nairs decided to take their own lives, police suspect. A.K. Nair, 70 years old, and his wife, Shyamal, 60, swallowed poison. Their middle-aged son and daughter hanged themselves.
Even short of such extreme cases, easy credit and its consequences have turned lives upside down. Call-center trainer Lloyd D'Souza, 28, wasn't interested in holding a credit card when a bank sales representative called him and persuaded him to take his first one seven years ago, he says. When it came in the mail, Mr. D'Souza put it in his drawer and forgot about it for six months. 'I guess I had a fear of the unknown,' he says.
He eventually started using the card for meals, then clothes. He got three other cards and used them to buy new furniture, lights and an air conditioner for his home, which he shared with his parents. He got a cash advance to help a friend, then a loan for a car. Today, close to 75% of Mr. D'Souza's salary goes to paying the minimum balance on his debt.
Reflecting all the fear is this week's premiere of the movie 'EMI,' which stands for equated monthly installments, a term retailers and travel agents use to let consumers know how little they will have to pay each month if they buy on credit. The movie features a newlywed couple who charge their honeymoon, among other things. The chorus of the title track is 'take a loan, take a loan.'
If borrowers are new to consumer credit, so are many Indian banks. The nation's legal system is too slow-moving to force repayment, and India doesn't have a mature credit-rating system. ICICI Bank's earnings, for the quarter ended Sept. 30, showed net profit flat from a year earlier at 10.14 billion rupees ($203.7 million), as the bank lifted its provisions for bad loans by more than 43%, to 9.24 billion rupees.
Credit cards have been an important avenue into the Indian home for global banks as well, including Citigroup Inc. of the U.S., and HSBC Holdings PLC and Standard Chartered PLC, of the U.K. While the foreign banks concede that the environment has gotten tougher and that delinquencies are on the rise, they say they have become stricter about who qualifies for their cards and expect growth to continue.
India's leading card issuers say they, too, are being more careful about who gets cards. 'We are being more particular than we used to be,' says Sachin Khandelwal, head of the card business at ICICI Bank. 'There has been a drop in demand, as well as a tightening of criteria by banks.'
Mr. D'Souza, the call-center trainer, says his parents warned him to stay away from credit cards. 'They never had cards,' he says, 'but somehow they knew.' |
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