India - Wages of Consumerism

Jyoti Thottam

Reverberations from the implosion of the U.S. debt bubble can be felt a long way from Wall Street. Gaurav Rege was a hotel manager near Rishikesh, an Indian hill station at the foot of the Himalayas. He and his new wife are young, educated, well-off — and worried. A member of India's growing consumer culture, Rege, 30, took out an adjustable-rate loan two years ago to buy an investment property near Bangalore, but his monthly payments have jumped because of tighter credit and rising interest rates. He has abandoned plans to get an M.B.A. because student loans are now too costly. The couple's stock portfolio has lost more than half its value since markets began melting down. "I feel scared, actually," Rege says of his crumbling finances. "You're sure for right now. But if things don't stabilize, then what?"
Thousands of Indians like the Reges are having similar doubts. Just as credit-happy Americans are being brought low by a housing-market meltdown and slowing economic growth, so too are Indians learning the downside of personal debt. Over the past five years, Indian banks, finance companies and retailers introduced a Western-style banquet of financial products to the country's rising middle class, whose members began tapping credit cards, consumer loans and installment plans to buy automobiles, washing machines, vacations — all those trappings of upward mobility that the few who could afford them once proudly purchased with cash. The country's central bank estimates that the amount of personal loans held by Indians nearly doubled from 2005 to 2007, to $106 billion; the country's credit-card industry has been growing at an average annual rate of nearly 30%. "There was an environment that was building up irrational exuberance," says Alam Srinivas, author of The Indian Consumer. "No one thought that anything could go wrong. The party never seemed to end."
Now comes the hangover as the middle class gets squeezed by soaring living costs — India's annual inflation rate is running at about 13% — and more expensive debt. Navtej Singh, a 48-year-old property agent in the northern state of Haryana, was horrified last month when the interest rate he pays on a $15,000 adjustable-rate home loan jumped from 9% to 12%. "There's no way I can [pay] that," he says. "I'll probably have to borrow from friends or relatives and curtail household expenses." Srinivas says a lot of people are in similar straits. Out of India's middle class of about 90 million people, some 20-30 million have taken on more debt than they can handle, he estimates. Rising rates of loan defaults appear to back up the claim. For example, nonperforming assets at ICICI Bank, India's largest private lender, rose to 1.8% of total assets in the quarter ending in June, compared with 1.35% a year earlier.
Lenders are scrambling to keep delinquency and defaults in check. Some banks are extending repayment periods and converting credit-card debt into personal loans at slightly lower interest rates so borrowers can remain current. Under pressure from investors and regulators to improve their deteriorating asset quality, banks are also curtailing riskier lending, such as small-ticket personal loans, and making more of an effort to verify creditworthiness.
No one is predicting a wave of bad debts will crash the Indian financial system and economy. That's because commerce on the subcontinent still runs mostly on cash. Dheeraj Dikshit, the head of consumer assets in India for U.K.-based bank HSBC, reckons that credit cards are used for only about 2% of all retail transactions. But cash-strapped consumers will still hurt economic growth. Many spend half their salary on car and house payments and will be forced to cut discretionary spending. Some sectors are already getting hurt. New car sales — 80% of which are financed — are slowing. Tata Motors reported a 3% decline in sales in August compared with the year before, while Maruti Suzuki reported a 9% drop. Commerce and Industry Minister Kamal Nath has been warning publicly that the country's GDP growth will slow this year to between 7% and 8%, down from more than 9% last year.
Nath and other government officials have been trying to reassure businesspeople and the markets that slower growth is a good thing — it might help get inflation under control — but the public isn't cheered. Opening this month is a new movie titled EMI, which stands for "equated monthly installments," an Indianism for an installment loan. The plot follows a thuggish Mumbai collection agent who, after hearing the touching stories of the people he is paid to intimidate, decides instead to help them resolve their crises by teaching them that more money isn't always the answer. "We made a film about the real problem that is facing the Indian consumer," says EMI's director, Saurabh Kabra. "We have to learn to live within our means." That's a moral that nowadays resonates far beyond India.