Households’ Balance Sheet Stress Exhibits K-Shaped Dynamics: Nomura

Households’ Balance Sheet Stress Exhibits K-Shaped Dynamics: Nomura

Sub: Eco

Sec: National Economy and National Income

Context: Nomura economists remarked household stress in India has also turned K-shaped

What is K-Shaped Stress?

It is rise in retail debt driven by consumption loans while asset-creating loans have a shrinking share

India’s household stress is bifurcated:

• Subprime Borrowers: Increasing consumption loans.
• Affluent Borrowers: Focused on asset-creating loans.
• Rising Debt:
  • Household debt now at 43% of GDP, up from 35% in March 2020.

Observations by Nomura Economists

• Retail Credit Trends:
  • Consumption loans dominate among subprime borrowers.
  • 60% of personal loan borrowers already hold more than three active loans.
• Macroprudential Tightening:
  • Retail credit growth has slowed due to RBI interventions.
• Cyclical Slowdown:
  • Evidence aligns with weak income levels and K-shaped urban consumption demand.

Concerns Highlighted by RBI

• Rising Write-offs:
  • Significant increase in unsecured retail credit write-offs and delinquency rates, especially in the microfinance sector.
• GNPA (Gross Non-Performing Assets):
  • Current GNPA ratio at a multi-year low of 2.6%.
  • Stress tests predict it may rise to 3% by 2025-26 under baseline growth and inflation scenarios. 

Implications of K-Shaped Stress

• Uneven Borrowing Patterns:
  • Subprime borrowers increasing high-risk, unsecured loans.
  • Wealthier groups leveraging for asset purchases, creating an uneven financial landscape.
• Financial Stability Risks:
  • Rising household debt and stress may undermine economic stability.

Recommendations and Observations

• Tighter Monitoring:
  • Focus on consumption-driven loans and delinquency trends.
• Policy Intervention:
  • Address disparities in urban consumption patterns and income levels.

The K-shaped trajectory underscores the growing divergence in financial health among Indian households, raising concerns over economic resilience and inclusivity.