Indian debt market: A leverage for growth or a new four-letter bad word?

Debt by definition is "an amount of money that you owe to somebody" or "the state of owing something"

A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.

Debt can be interpreted as a good sign, if it's a force-multiplier for investments and development; the same act of borrowing can be seen as an indicator of crisis, if done under duress or as a means of basic survival. Depending on how the debt is sourced and from whom, the social positioning of the borrower has an impact.

Debt was a bad word in the then-societal context, until the retail boom started in the Indian market in the late 90s/early 2000s. In fact, there was so much credit aversion that the toughest competitor to any lending institution was the "father-in-law" who gave the interest-free-loan, with "payable when able" tenure.

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Credit, as a way of life

Looking at both the data of lenders as well as the social context, Indian millennials & Gen-Z accept that "credit" is a way of spending or investing. Debt is not a bad word anymore.

They don't mind taking a loan - consumer loan, personal loan, or any other loan - to buy anything from a global-fashion-brand-jeans to a large screen LED TV to a vehicle to a house to even holiday in a dream-destination. Of course, financing options are an able tool that smart e-commerce platforms offer in recognition of this consumer base. And to top it off, there are finance brands which have recognised this segment's credit needs and even offer bridal makeup loans.

A look at the societal context 30 years ago would give us a different impression. Parents of that generation would "invest" (borrow for what they thought was an appropriate reason) in the education needs of their kids. Next in line was the kids (especially daughter's) marriage expense. The average age of a first home buyer in the 1970s and 80s was more than 45 years.

Access to credit has vastly improved over the years, as some of the proactive banks/non-bank lenders and the digital-lending platforms started using credit bureau data/technology including understanding credit modelling using borrowers' digital footprint and other surrogate inputs to give "instant credit decisioning".

For those immensely worried that Indians are spending their way to hell, take solace : India's household debt as a percentage of GDP is just 11 %. The US has over 80% and the nation that we want to compete with and win - China - has over 50%. However, the data also indicates that in the past 5-6 years, the average Indian household debt (that covers all categories of loans) has doubled, as the cost of credit reduced.

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Indian public debt genesis & debt markets

In the 18th century, princely states scattered across India borrowed monies from local individuals whose families acted as financiers and bankers. The East India Company championed the idea of borrowing from citizens (public) in India to finance its battles in South India in the 18th century.

The debt owed by the government to the public came to be known as public debt. The company worked hard to establish government-owned banks towards the end of the 18th Century, to raise short-term finances from the banks on more satisfactory terms than they were able to garner on their own. This had more to do with debt management.

The modern Indian debt market is largely a wholesale market with the bulk of institutional investors comprising mainly banks, financial institutions, mutual funds, EPFO, insurance companies and corporates.

The concentration of these players has resulted in the debt markets being fairly skewed, almost having bilaterally-priced trades. It also lacks the retailness and contractual transparency that Indian capital markets have been able to build over the past two decades. Structurally, the debt market remains firmly skewed towards government securities (G-secs). Also, the largest investor group in the G-secs market are the banks, due to their regulatory requirement to invest into SLR.

However, over the past few years, the domestic corporate bond market has seen increasing volumes, largely due to financial investments going into it, including retail participation. Also, the banks had temporarily ceded space to non-banks over the past many years; they also found it easier to buy securitisation pools to achieve their PSL targets, rather than develop competencies that NBFCs had built in serving affinity groups, in smaller cities and towns.

Also Read: $75 trillion global corporate debt - a bubble: UNCTAD

And post the ILFS crisis, the debt markets started shunning non-banks again. This made the credit-confidence dip, in which the sufferers have been the industries which have been deprived of liquidity, thus further worsening investment sentiments.

With COVID-19 impact, various state governments and industries will need further liquidity to stay afloat and to fund various social and sectoral spends. An Indian corporate raising Rs 1,000 crore debt would not have appeared as front-page news in any of the business newspapers a few years ago. Suddenly the threshold number for debt issuance seems to be Rs 100 crore to appear as a front-page news. This shows the fragility of the economy and the aversion of the overall debt markets.

Somehow, we have not shaken off our societal stigma of "debt" as a practice and we are caught up in the dilemma if we want to use debt as a leverage for growth - both for individuals or governmental spending. Moral hazarding does not work well or serve any purpose. The way we use discipline to work with debt will determine if it "Damages Equilibrium and beseeches trouble" or "develops economy and balances trade".

Hopefully, debt and the myths around it will not become the greatest leveller and debt would not be the new-four-letter-bad-word. Until debt do us apart!

(The author is an independent markets commentator.)