The Great Indian Consumer Story

We have all heard of the great Indian consumer growth story wherein every brand is eyeing for all the eyeballs & increasing spending power of Next Gen India. The growing consumer base is tech savvy & is also spending a lot more than the previous spend thrift generations. That got me thinking on the future of Indian banking industry (15-20 years down the line) in this context. Few data points to note while considering this:

o   Indian Household debt has been going up & the average savings rate has been going down every year for a few years. There has been a big change in investment, spending & saving behavior of the consumer.

o    The tech savvy next gen has newer avenues of investment (MF, P2P loans, simpler options like sweep In FD’s/net banking) & is actively using these for their banking needs.

o   Growing credit culture: The generation is also not averse to debt as the rise of EMI culture has hit the Indian economy as well which we believed to be the bane of western economies only.

The fallout of these data points could be:

-          Macro: The increased household debt could be a problem in recessionary times. As average Indian household income is lower, they will be more prone to such shocks & might need bailouts/loan waivers. Govt borrowings could go up with inflationary shocks being more rapid than regular business cycles.

-          Banking:

o   Liabilities:  The SA book in CASA will surely go down as :

§  Lesser number of people are keeping money in their bank savings accounts & are looking at other avenues of investment/liquidity. This trend will only continue to grow.

o   Assets:  The effect on assets might be :

§  This loss of SA base will lead to ALM /pricing issues which might lead to higher interest costs as the effect of SA loss will surely come back to effect the loan pricing. The higher interest costs would affect corporate banking customers as well.

§  Lower savings rate might lead to higher delinquencies on loans as well. We already see higher credit card debt for Indian consumers (It is a vicious cycle which is very difficult to get out of).  

§  Margins for retail banking would be under pressure & subsequently corporate bank as well.

-          MF Industry: MF industry will surely benefit gathering this liability business (It has been growing well over the past few years)

-          Fintech: The fintech industry is tapping the payment landscape & will benefit from the pie of market being taken from banks/new borrowers inducted into the formal borrowing economy.

The current household debt figures are not at any alarming levels & with a growing economy these figures should not go out of hand. But a major point to consider is that Debt provides a good boost to consumption/GDP growth in the short term but in the long term it can have catastrophic significance. The only point to consider is that whether the necessary evil (debt) will have more short term benefits or a higher long term negative.