The one aspect of the modern shopping that confounds Bertie is the selling establishment’s insistence that buyers pay for their purchases in instalments rather than upfront. In fact, things have become so perverse that only if you buy things on credit, can you avail certain discounts. Bertie wonders if these supposedly free lunches of ‘pay later, pay lesser’ are indeed free.
Bertie voiced these concerns to a banking analyst friend who instantly mailed him some charts. They were from recently released Financial Stability Report by Reserve Bank of India. The first chart showed India’s rising household debt. As a share of GDP, it is now 43% and has risen a good 7 percentage points in last four years. To drive home the point, this chart was accompanied by one that showed the dwindling net financial savings of Indian households. Again, the culprit was rise in household financial liabilities a.k.a. loans.
While Bertie was digesting these details, a few more charts landed in his inbox. He had clearly touched a nerve. This one showed that almost half of the aforesaid household loans were taken for consumption; not for buying assets like a house or a car and the proportion of such consumption loans increased for the lower income households. In summary, Indian households were taking on an increasing amount of debt for their consumption needs and this trend was starker as one went down the income pyramid.
“Saw the charts?” the analyst friend asked over the phone. Bertie wanted to play devil’s advocate and bring his knowledge of world markets to bear so he said, “43% is not bad, Rik. By emerging markets standards.” Rik was prepared for this. “Agreed,” he said, “but you have to adjust for our per capita income. Quasi-developed EMs like Korea and Taiwan can have higher household loans but at our per capita income, we shouldn’t.”
“What do you think is causing this, Rik?” Bertie asked. “A good thing taken too far! Wide availability of credit scores and tech-enabled seamless lending. Not to mention the hungry lenders whose investors reward them for high growth.” As he hung up, Bertie’s reminisced about the ‘aaj nagad kal udhar’ warnings that kirana stores used to display but that thought was followed by a sinking feeling that the time to pay for the free lunches is probably here.
So, who is benefitting?
Bertie kept thinking about this household debt issue through the week and like any good fund manager decided that, despite the apparent risks, he should find ways of benefitting from this trend. The logical place to start was by asking: What consumption items were these households buying with borrowed money? With this question in mind, Bertie called his favourite consumer analyst who reported about uniformly tepid growth numbers across multiple categories. If you looked at the consumption growth charts hard enough, you might see some signs of life in electronics purchases but not much else.
A disappointed Bertie started scratching his head and after staring at the white-washed office wall for a while, he came to the well-flogged answer – “futures & options”. The length and breadth of India, he concluded, is losing money hand over fist in this casino and the evil prop firms with their sophisticated trading algorithms were leeching the gains. It was time to call the non-lending financials analyst to look for stocks that benefitted from this explosion in trading.
But he, too, poured cold water over Bertie’s armchair theory of levered consumption. “Nobody has an official estimate of F&O losses incurred by households. But I doubt it is anywhere close to the number you mention. You will be surprised though how much people are betting on fantasy sports, online rummy and poker.” After some more head-scratching and wall-staring, Bertie called his batchmate who worked at a leading fantasy sports firm and narrated his theory. He was hoping that the friend would be suitably impressed but he laughed for two minutes straight before saying, “No blood-sucking algos in fantasy sports and rummy and poker, you agree?” Bertie grunted his agreement. “So, it’s a zero-sum game, na! You lose hundred rupees; I win hundred rupees. How does that add to overall household debt? In fact, 99% of users on our platform have never won or lost more than ten thousand rupees in their life-time. It’s just one big Diwali taash party.”
Bertie hung up again. His brain was incapable of any further theorising so he decided that staying away from the hungry lenders who had turbo-charged this trend was the only ‘trade’ he was going to put on.
Bertie is a Mumbai-based fund manager whose compliance department wishes him to cough twice before speaking and then decide not to say it after all.
