New Delhi: Finance Minister Nirmala Sitharaman may have attributed the slowdown in the auto sector to the millennials’ wariness to get into the cycle of monthly installments, but banks and analysts disagree.
India’s young are not wary to borrow. They are much more comfortable with credit compared to the older generation, they say.
The younger generation takes loans for everything — from purchasing an air-conditioner, fridge, television, washing machine to high-valued items like cars or even taking an unsecured personal loan to travel to their favourite destination.
In contrast, the older generation mainly take loans to buy a house or a car, but hardly for buying consumer durable items.
Access to credit has also improved as banks, especially the private ones, are using technology, credit scores and other information to apprise the young borrowers of a quick hassle-free loan process.
Borrowing is not an issue for younger generation
Vishnu Krishna, 27, is a chartered accountant in New Delhi and has been working with a leading multinational firm for the last two years. He bought a Ford Ecosport costing around Rs 11 lakh within a year of working.
He opted to take a loan of Rs 8 lakh from Kotak Mahindra Bank at an interest rate of 8.25 per cent that makes him pay a monthly EMI of Rs 18,000. Less than a year into the car loan, he purchased an iphone XR costing Rs 75,000. He took a loan with a 14 per cent interest and now pays an EMI of Rs 8,000.
Krishna also opted to purchase an air-conditioner costing Rs 30,000 on installment a few months back with an EMI of Rs 3,000 per month. All together, his EMI payouts are around 40 per cent of his monthly salary.
When asked if he wasn’t wary of the multiple EMI claims on his salary, he said: “My firm does not have a hire-and-fire policy, so I have job security. That is one of the main reasons why I am comfortable with the multiple EMIs.”
Krishna, who lives with his parents, does not have other living expenses like rent.
Prakhar Dua, a lawyer based in Mumbai, said he consciously opted to go for the EMI route in purchasing items for his house. “I bought most of my furniture and appliances on EMI — either 6 months or one year. It does not make sense to make a lump sum cash payment when you have the option of 0 per cent EMI,” he said.
“Most of my colleagues followed this route and as long as the EMIs are less than 30-40 per cent of your salary, it should not pose a problem,” he added.
Dua and Krishna are part of a larger trend of young people borrowing from banks to maintain a lifestyle.
BankBazaar, a loan aggregator, in its aspiration index survey for 2019, found that while people in the age group of 22-27 years are big users of credit cards with 76 per cent using them for credit card expenses, people in the 27-34 years are leading borrowers in almost every segment — credit cards, home loans, car loans, personal loans and even gold loans. They point out that taking a personal loan has become as easy as “shopping online”.
Adhil Shetty, CEO of BankBazaar, said credit cards and personal loans are popular products.
“The lowered age at which people start their careers coupled with the higher salaries and a global outlook have made people open to the idea of taking a loan to fulfill their aspirations,” he said, adding that the younger, online generation needs a low amount, but the requirement is instant.
“Be it a personal loan for medical emergencies or for marriage or just about anything else, the call is for instant processing and disbursal,” Shetty added.
“Borrowing is not an issue. Auto loans and consumer loans are growing. Indian households are borrowing to meet their consumption requirements and their liabilities are increasing. We are seeing people in the age group of 25-30 years also taking loans,” said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.
“The leverage of Indian households is less than 10 per cent of the gross domestic product. It has gone up over the years but is much lower than the rates in other countries like China,” he said, adding that getting a personal loan is not difficult if one has a good credit score.
Gaurav Gupta, founder-CEO of MyloanCare.in pointed out that the younger generation is “far more open to credit as a way of life” compared to the older generation.
Also read: Maruti contradicts Sitharaman’s millennial remark, says cabs not a factor in auto slowdown
Do the young get loans easily?
“Most young borrowers don’t have an adequate credit history. They are what we call a ‘thin file’ client and credit score becomes a non-existent parameter. In that case, banks use alternate data to establish the credit profile,” said Gupta.
In the absence of a credit score or credit history, the new entrants to the workforce are apprised of their employers, the duration of their employment, their salaries, their residential address and the number of dependents, among other things, he said.
Shetty said the main criteria for checking the credit-worthiness are the credit score and credit history of the borrower. “If you do not have a credit score or history, the banks do not have anything about your money management skills. There is no way the bank can evaluate your financial behaviour. This makes you a risky customer from the lenders’ perspective. This can lead to higher loan rates at the outset,” he said.
“In the absence of a credit history, factors such as financial stability come to matter. Regular employment record plays a vital role in making a customer eligible for unsecured loan. Salaried individuals with at least 2 years of professional service or a self-employed person with a minimum 5 years of earning tenure will be considered eligible for a personal loan. If your financial statements show a lot of instability — say, periods of no income or constant change of employment — it could undermine your loan eligibility and lenders would be less willing to give you a loan,” he added.
Suresh Sadagopan, founder of Ladder7 Financial Advisories, a financial planning/advisory firm, said the millenials are looking for experiences rather than just buying objects that are a necessity.
“Be it spending on an iphone, high-end sound system or a vacation, the younger generation is willing to borrow for an experience,” he said, adding that access to credit has also improved with many zero EMI schemes and banks willing to dole out pre-authorised credit to borrowers.
Sadagopan said that the younger generation typically does not opt for credit against a collateral like gold or a house.
Also read: Slowdown is choking Tamil Nadu auto hub, but talking about it can get workers fired
Private banks more active in personal loan segment
Private sector banks are more active in the personal loan space as compared to state-run banks and have been aggressively growing their personal loan portfolios despite the growing risk of default.
Personal loans, being unsecured loans, are typically a riskier segment.
HDFC Bank, with a retail book of more than 50 per cent of the total book, is a market leader in the credit card segment. HDFC Bank’s personal loan portfolio grew 25 per cent, credit card grew by 29 per cent and auto loans were up 5.5 per cent as of June end. However, the bank, in a conference call with analysts, said that it had stepped up the provisions for the unsecured book in the financial results announced for the June-end quarter, in an indication that it fears delinquencies could rise in the future amid an economic and consumption slowdown.
“Studies conducted across the Indian markets are showing that customer leverage is increasing, frequency of borrowing is increasing and the ticket size is increasing across secured and unsecured personal loans across the country,” said Jimmy Tata, Chief Risk Officer at HDFC Bank, in a conference call with analysts after the June quarter results, adding that the bank’s selection process of borrowers is better than its competitors.
ICICI Bank, in its quarterly earnings’ call with analysts, pointed out that personal loans and credit card loans are about 8 per cent of their overall loan portfolio, and auto loans around 5 per cent of the overall portfolio.
While personal loans grew 54 per cent in the June-end quarter, credit card growth was 33 per cent and vehicle loans stood at 18 per cent. The bank said the credit quality of the personal loan and credit card book continued to remain stable and pointed out how the bank managed to grow in this segment through cross-selling.
The bank’s executive director Anup Bagchi said ICICI bank has a very low penetration when it comes to unsecured loan portfolio.
“Wherever we have seen early warning signals, we have been cutting those segments or geographies quite proactively. At this point of time, we are not seeing any stress on our portfolio. We have also been checking with the credit bureau and as of now our numbers look good,” Bagchi said.
Gaurav Gupta of MyloanCare.in said state-run banks are pretty conservative when it comes to unsecured lending, but private banks are more open.
“Typically, state-run banks give personal loans only to customers who have a savings account or a salary account with them. On the other hand, private sector banks don’t insist on them. Also, private sector banks are more likely to give loans to young people who have recently entered the workforce as compared to state-run banks as they have their own tools and analytics available,” he said.
An official of Punjab National Bank, who did not wish to be identified, said there is demand from the younger generation for personal loans and the bank actively disburses such loans subjected to checks.
Typically, unsecured loans are given to only those people who have a salary account with the bank, he said.
The interest rate on personal loans vary between 10-24 per cent with state-run banks lending at around 11-15 per cent and private banks lending at as low as 10 per cent to credit-worthy borrowers and as high as 24 per cent to riskier borrowers.
According to RBI data, as of July end this year, personal loans constituted 27 per cent of the total loans given by all banks as against 24 per cent around the same time in 2017 and 25 per cent in 2018. But this trend reverses if one excludes some secured loans like housing loans, reflecting the slowdown in consumption and discretionary spending by Indians.
Also read: Nirmala Sitharaman’s not wrong. Ola and Uber can hurt car sales
Alcoholic and pot headed millennials prefer cabs and not personal cars.
The youngsters are sure borrowing and spending as you say, Ramya ji, but not much on durables but on consumables like Alcohol. Affluent Kerala is an ideal example. 400-plus crores spent on liquor a single day, to celebrate Onam festival !
Personally I am not comfortable with this borrow to spend culture. Several countries have racked up huge household debt. In the US, student loans are about $ 1.5 trillion and a lot will turn bad. Even in today’s changed culture, what would get my vote is a young couple taking a loan to buy an apartment – ready possession, no longer under construction or planning – and perhaps a car. Cutting rates to induce people to borrow more has never restored any economy to health. For ten years, Count Draghi has kep rates ultra low and Europe is still growing at an anaemic one per cent.