Debt weighs on Indian middle class

Mahendra Shirole, a young man with a tall, burly frame, isn’t a mafia extortionist. But by his own admission, his job isn’t markedly different.

He is a private money recovery agent hired by banks and credit card companies to collect debts from cardholders. In recent months, life has gotten a lot busier.

“I usually try to recover payments by nonviolent ways,” Mr. Shirole says, “but if they don’t work, I don’t have another option.”

As India’s economy boomed in recent years, millions of upwardly mobile Indians embraced debt-fueled consumerism – ignoring the warnings of frugal generations before them who historically stuck to cash transactions.

But as the economy has slowed, job cuts and shriveling salaries have left more cardholders with rising debt – and more agents like Shirole on the payroll. Defaults have risen between 50 and 70 percent in the past six months, according to rupeetimes.com, an Indian finance portal.

Outstanding loans on credit cards reached $6 billion at the end of 2008, up 85 percent from the previous year, according to CRISIL, a ratings agency. In New Delhi alone, already overburdened courts are dealing with 400,000 cases of bounced checks, mostly payments for credit card purchases, according to government figures.

India currently has 30 million credit card holders, triple the number half a decade ago. In the past two years, the average credit card spending by an Indian has jumped about 30 percent, to Rs 2,400 per month ($48). Indians took on credit-card debt worth $14 billion in 2008, three times higher than just four years ago.

“It seems that India is likely to face a debt trap,” Ankit Sharma, a private finance expert, wrote in a column published at www.rupeetimes.com.

Feeding middle-class aspirations

After growing 9 percent annually for the past three years, the Indian economy is expected to slow this year – the International Monetary Fund projects just 5 percent growth for India’s GDP in 2009.
Before the global slowdown, for years Indians enjoyed one of the highest salary increases in the world. Salaries rose by 15.1 percent in 2008 – the highest in Asia – according to Hewitt Associates, a global human resources company.

The extra spending money spawned an appetite for swanky cars, cellphones, iPods, and other symbols of middle-class aspirations. In recent years, India has become the 12th largest consumer market.

During the years of economic boom, credit card companies aggressively targeted this 300 million-strong, high-earning, high-spending class – a largely urban populace whose earnings ranged between $4,500 and $22,000, according to the National Council for Applied Economic Research, a New Delhi-based think tank.

Three years ago, no sooner had “Ankur Jaiswal,” a young man who spoke on the condition that his real name not be used, taken a job at an outsourcing firm in Pune than he was flooded with offers from “pesky” credit card marketing agents.

Over the years, as he splurged on a motorcycle, plasma TV, and touch-screen cellphone, among other items, his debt rose to Rs. 250,000 ($5,000), which he is currently struggling to pay back at a monthly interest rate of 3.5 percent.

“Credit card is a devil that tempts you to spend even on an empty pocket,” he says. “I keep paying off interest every month and the principle sum doesn’t budge.”

So far Mr. Jaiswal has managed to keep the recovery men at bay but fears he’ll be harassed by them if he loses his job in this harsh economic climate.

For defaults, 49 percent interest

Mr. Sharma, writing in rupeetimes.com, doesn’t blame the rising delinquency levels on reckless spending, but instead on the interest rates charged by credit card issuers.

For credit cards, banks charge interest rates up to 3.5 percent per month, up from 2.7 percent in mid-2008. That amounts to a 42 percent yearly rate.

Credit card companies say they charge high interest rates because they have no collateral against credit card debt, and legal channels to make clients responsible for their payments can be time-consuming.

In February, the Supreme Court ruled that credit card companies could charge defaulters a hefty penal interest of up to 49 percent, up from 30 percent last year.

While cardholders rue this decision, banks say it has come as a reprieve, given the losses mounting in the once-profitable credit card sector.

Business at ICICI Bank, India’s largest private bank and a major player in the consumer credit market, grew 20 to 25 percent in fiscal year 2008, says Sachin Khandelwal, head of the cards division. “We had done 1.5 million cards in 2007-08, which has been reduced by 60 percent in the first 10 months of 2008-09.”

In September last year, State Bank of India, a nationalized bank, reported its credit card division had incurred a loss of Rs. 60 crore ($12 million). In the previous fiscal year, it lost Rs. 150 crore ($30 million). This trend, Mr. Khandelwal says, is likely to continue.

“A car loan is easy to recover. If he doesn’t pay up, you can pinch the car,” explains Shirole, the debt collector. “But recovering credit card dues – they are a major headache. The brief I get from banks is to try recover 70 to 80 percent of payments, if not all.”

Mr. Jaiswal rues the day he got himself a credit card. His father, a retired government employee, had warned him against aping this reckless “Western habit,” he says.

“It’s not a good habit to purchase [things] using plastic money,” he says. “Only when you have real cash in your pocket should you spend.”