Indians spending more on Credit Cards than ever before, Can it lead to financial crisis?

Credit card spending in India has surged to a record high, raising concerns of potential defaults as indebted households step up their borrowing spree ahead of the festive season.

The amount transacted through cards rose to an all-time high of ₹1.48 trillion ($17.8 billion) in August, up from July’s ₹1.45 trillion, according to the latest data by the Reserve Bank of India.

This spending spree is in line with rising indebtedness and falling savings among Indians, and may point to growing stress as incomes stagnate.

“The card spends indicates people are borrowing to spend,” said Rupa Rege Nitsure, Group Chief Economist of L&T Finance. “As loans on credit cards are unsecured, there is a risk of high defaults,” particularly if economic growth slows later in the year.

The rising spends also point to an aggressive retail push by lenders in the under-banked Indian market. Post-pandemic, banks have expanded their balance sheet mainly by funding individuals, while credit demand from businesses has somewhat lagged.

Record-low rates offered to meet pent-up demand has seen banks’ retail loan portfolio double between 2019 and now, raising concerns among policymakers.

In simpler terms:

Indians are spending more money on credit cards than ever before, which is worrying because it means they are borrowing more money. This could lead to problems if people are unable to repay their debts, especially if the economy slows down.

Banks are also pushing credit cards hard, especially to people who don’t have many other banking options. This is because there is a lot of demand for credit in India, and banks want to make money by lending money to people.

The government is worried about this because it could lead to a financial crisis if people start defaulting on their loans.