Higher-than-expected GDP figures buoyed sentiments last week, but the subdued expansion in private consumption has cast a shadow on the prevailing optimism. The sluggish consumption growth has come at a time when personal loans are experiencing robust growth, raising questions about the borrowers’ spending destination.
Bankers believe a significant portion of these funds is either being used to repay existing loans or invested in the stock market for speculative purposes. Usually, higher personal loans should lead to higher spending by borrowers on consumer durable goods, but this has not been the case so far.
Private final consumption, which includes money spent by consumers on buying goods and services, grew by just 3.1% in the second quarter of the current financial year. Personal loans have grown by 30% in September, 31% in August and 32% in July, according to the Reserve Bank of India (RBI) data. Total personal loans outstanding of commercial banks stood at Rs 48.26 trillion as of September end this year.
“We do not have the exact data about the end use of the personal loans. when asked about the motive for taking personal loans, borrowers only mention ‘personal use’ in the form. These loans are spent to either buy consumer goods or to pay their pending loans and credit card dues,” head of retail banking of a private bank told FE, who wished to remain anonymous. “Some borrowers come to us at regular intervals and we know that they are borrowing to clear their old loans,” he said.
Personal loans are also taken to meet shortfall in amount required to pay as down payment for home loans and vehicle loans, he added.
A bull run in the stock market has also fueled the demand for personal loans. Carried away by rising share prices, many individuals are turning personal loans to bet on shares to make quick money. However, majority of such people end up burning their fingers, experts said.
“Many customers see personal loan as a shortcut to make money from share market but most of them end up losing money,” said head of consumer banking division of a public sector bank. “The temptation to take a personal loan is very high when stock market is rising,” he added.
However, low private consumption amid high personal loan growth is a positive news for the central bank. Experts say that this means the risk of overheating of economy is low. “The RBI and MPC can take some comfort from the fact that private consumption is still low despite the rapid growth in personal loans because it minimises the risk of overheating of economy. Thus, lowering risk of generalised inflation, balance of payment and currency,” said Soumyajit Niyogi, director, core analytical group, India Ratings & Research.