In recent months, the amount of credit card debt in India has been on the rise, leading to increased defaults and signaling growing financial distress among borrowers. As of June 2024, credit card defaults reached 1.8%, up from 1.7% six months earlier and 1.6% in March 2023, according to data from TransUnion Cibil. While this percentage increase might seem small, the actual amount owed by credit card holders has risen significantly.
The Surge in Outstanding Credit Card Debt
As of June 2024, the total outstanding credit card debt in India stood at nearly ₹2.7 lakh crore (about $33 billion). This is an increase from ₹2.6 lakh crore in March 2024 and over ₹2 lakh crore in March 2023. To put this in perspective, before the COVID-19 pandemic in March 2019, the total outstanding credit card debt was only ₹87,686 crore. This shows a staggering compound annual growth rate (CAGR) of 24% over the past five years.
This trend is creating pressure on the unsecured lending market, which includes credit cards and personal loans. According to a report by Macquarie, many young millennials are using their entire credit limit and defaulting on payments, often becoming non-performing assets (NPAs) without even attempting to pay down their debt.
The Default Dilemma
Suresh Ganapathy, a research analyst with Macquarie, highlights that net credit losses for credit cards are now around 5-6%, with SBI Cards reporting even higher losses at 7.5% in the last quarter. The situation is compounded by the fact that many credit card issuers serve a higher percentage of customers from the open market—50% for SBI Cards compared to only 20% for traditional banks.
The cycle of default often begins when a borrower makes a large purchase, planning to repay it in installments. However, outstanding credit card debts can accrue interest at rates as high as 48% annually. This leads many borrowers to a point where they can only afford to make the minimum payments. Ritesh Srivastava, founder and CEO of the debt relief platform Freed, explains that to meet these minimum payments, borrowers often resort to taking out small personal loans, creating a cycle of debt known as “loan-stacking.”
The Impact of Credit Scores
Interestingly, credit scores may not act as effective safeguards for borrowers. As long as individuals continue to make their minimum payments, they are not considered defaulters. This situation allows many to accumulate significant debt without immediate consequences.
Ritesh, who has experience in debt relief strategies in the United States, notes that credit card companies are employing similar tactics in India. They are encouraging big-ticket purchases at lower prices when paid via credit cards through equated monthly installments (EMIs).
A Silver Lining?
Despite the rising stress in the unsecured lending sector, Ganapathy points out that the Reserve Bank of India (RBI) has been proactive in managing the situation. Following measures taken in November 2023, credit growth in unsecured segments—including personal and education loans—has decreased from a peak of 25% to 15%. Ganapathy believes that the RBI will be satisfied with these desired outcomes.
Conclusion
The increasing trend of credit card debt and defaults highlights a concerning trend in borrower behavior, particularly among younger individuals. While some measures have been implemented to curb this growth, the situation remains critical. Borrowers need to be aware of the risks associated with high credit card usage and the importance of managing their debts responsibly to avoid falling into a cycle of financial distress. As always, it’s essential to stay informed and seek help if needed to navigate the complexities of personal finance.
