Making sense of the rise in consumer loans

During the coronavirus pandemic, consumption fell as people saved for medical exigencies. Lately, demand for consumer loans has been rising. In July, credit growth in personal loans was up 18.8% from a year ago, against 11.9% in July 2021. The demand was primarily in housing and vehicle loan segments, indicating that discretionary demand is reviving. It is also important to note that the rise in demand comes despite costlier loans, after the Reserve Bank of India repeatedly raised policy rates. The demand for consumer loans is expected to rise further, with the festival season round the corner.

Do consumer loans raise quality of life?

The indulgence in consumer loans began mostly in the post-liberalization era with the availability of equated monthly instalments (EMIs). This facility helped an individual purchase a home, vehicle or gadget even before mobilizing the required resources. It helped young profe-ssionals start enjoying life at the beginning of their career unlike in the past, and helped improve the ease of living of citizens. A good credit score can make access to finances much easier and help the individual qualify for lower interest rates and give higher negotiating power to individuals while applying for a loan.

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What does RBI’s consumer confidence survey indicate?

According to RBI’s latest consumer confidence survey, the current consumer perception on the general economic situation, employment scenario, overall price situation and income and spending levels, though in the pessimistic terrain, still rose to 77.3 from a low of 49.5 in July 2021. The majority of the households reported a rise in their current spending.

How do consumer loans impact demand?

Consumer loans get translated into consumption expenditure immediately, enabling individuals to advance their purchases. During the pandemic, people saved and avoided consumer loans. Private final consumption expenditure, which on an average forms close to 60% of gross domestic product, had dropped to approximately 54% in the first and second quarters of FY21 and recovered to 59.9% in the first quarter of FY23. Demand constraints had resulted in a fall in consumption expenditure as well as consumer loans.

What is its significance for the economy?

Higher private consumption expenditure and greater demand for consumer loans will aid the economy, as demand for consumer durables, auto and housing rise. The revival in related indicators such as retail payments, settled through UPI and credit cards, match the trend in consumer loans. As per RBI, in August 2022, UPI transactions rose by 68% from the previous year. The revival in air travel and the hospitality sector also boosted credit card spending.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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