Giving meaning to the rise in consumer credit


What is the evolution of consumer credit?

During the coronavirus pandemic, consumption plummeted as people saved for medical needs. Lately, the demand for consumer loans has increased. In July, growth in loans to individuals was up 18.8% year on year, compared to 11.9% in July 2021. Demand was mainly focused on the mortgage and car loan segments, a sign of a renewed discretionary demand. It is also important to note that the rise in demand comes despite more expensive loans, after the Reserve Bank of India repeatedly raised its key rates. Consumer loan demand is expected to increase further as the festival season approaches.

Does consumer credit improve the quality of life?

The indulgence for consumer loans started mainly in the post-liberalization era with the availability of equivalent monthly installments (EMI). This facility has helped an individual buy a house, vehicle or gadget even before raising the required resources. It has helped young professionals to enjoy life at the beginning of their career unlike in the past, and contributed to improving the living comfort of citizens. A good credit score can facilitate access to finance and help the individual qualify for lower interest rates and give individuals higher bargaining power when applying for a loan.

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What does the RBI Consumer Confidence Survey indicate?

According to the latest consumer confidence survey from RBI, the current perception of consumers on the general economic situation, the employment scenario, the overall price situation and the levels of income and expenditure, although in pessimistic ground. , rose further to 77.3 from a low of 49.5 in July 2021. The majority of households reported an increase in their current spending.

What is the impact of consumer credit on demand?

Consumer loans translate immediately into consumer spending, allowing individuals to advance their purchases. During the pandemic, people saved and avoided consumer loans. Private final consumption expenditure, which on average accounts for almost 60% of gross domestic product, fell to around 54% in the first and second quarters of FY21 and recovered to 59.9% in the first quarter of FY23. Demand constraints had led to lower consumer spending as well as consumer credit.

What is its importance for the economy?

Higher private consumer spending and increased demand for consumer loans will support the economy as demand for consumer durables, automobiles and housing increases. The recovery of related indicators such as retail payments, settled by UPI and credit cards, matches the trend in consumer loans. According to RBI, in August 2022, UPI transactions increased by 68% compared to the previous year. The recovery in air travel and the hotel sector also boosted credit card spending.

Jagadish Shettigar and Pooja Misra are faculty members of BIMTECH

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