The Story Of Soaring Loans…And Defaults. How Credit Has Taken Over Lives With Little Deposits. No Salary Hikes But Living Costs Remain Steady, An Overall Rough Ride?

The Story Of Soaring Loans – The year 2024 has been an economic rollercoaster for many Indians. While salary hikes remained a distant dream for most, layoffs added to the distress, painting a grim picture of an already tight job market. Amidst this financial strain, borrowing has become a lifeline, albeit one that is pulling many deeper into a debt spiral.

A recent report illuminates the alarming trend- lending grew faster than deposits in the final fortnight of 2024. While credit grew by 11.16% year-on-year, deposits increased by only 9.8%, according to Reserve Bank of India (RBI) data as of December 27. Aggregate bank deposits stood at ₹220.6 lakh crore, while total bank credit reached ₹177.43 lakh crore. This mismatch pushed the credit-deposit ratio to 80%, up from 79% in the same period last year.

Microfinance. A Sector in Distress

The microfinance sector, catering to the most vulnerable borrowers, is under immense stress. About 5 million micro-borrowers, nearly 6% of the total base as of November, have loans from four or more lenders, signaling a worrying level of indebtedness. Another 11 million borrowers—13% of the total microfinance base—are juggling loans from three or more lenders, as per credit bureau CRIF High Mark.

This over-dependence on credit has triggered a surge in defaults, pushing gross non-performing assets (NPAs) in the sector to an 18-month high of 11.6% as of September.

Loans in this sector are collateral-free, targeted primarily at women from households earning less than ₹3 lakh annually. However, the ratio of borrowers with loans from four or more lenders has risen alarmingly—from 4.14% in June 2022 to 5.6% by November 2023, according to CRIF High Mark.

RBI norms mandate that repayment obligations should not exceed 50% of a household’s monthly income. Yet, this rule is often breached, leading to repayment challenges and ballooning defaults. The gross non-performing assets (NPA) ratio for the sector hit an 18-month high of 11.6% by September 2024, spotlighting the systemic strain.

The Impact of Regulation and Market Trends

Since October 2022, the number of lenders per borrower has risen, partly due to the RBI’s uniform guidelines for lenders targeting bottom-of-the-pyramid borrowers. However, these measures have not alleviated the sector’s woes. Regulatory clampdowns on unsecured lending and credit card usage have slowed retail loan growth, while higher risk weights imposed by the RBI have tightened the flow of bank loans to non-banking financial companies (NBFCs).

Deposits, on the other hand, remain sluggish despite banks raising interest rates since May 2022 to attract savers. Savvy investors are shifting their money to higher-return instruments like stocks and mutual funds, leaving banks struggling to raise funds to meet credit demand.

A Bleak Outlook

Ratings agency ICRA has revised its credit growth estimate for FY 2025 downward to 10.5-11.0% from an earlier projection of 11.6-12.5%. The slowdown reflects banks’ efforts to reduce their credit-to-deposit ratio and limit exposure to high-risk segments like unsecured retail loans and NBFCs.

Looking ahead, the banking sector faces a host of challenges, including an elevated loan-to-deposit ratio, higher provisioning requirements for the infrastructure sector, and the introduction of expected credit loss norms.

The Middle Class And Loans

The middle class is emerging as the biggest casualty of 2024’s economic turbulence. Inflation, stubbornly high at 9-11%, has wreaked havoc on household budgets. By October, retail inflation hit a 14-month high of 6.21%, with vegetable inflation soaring to a staggering 57-month high of 42.2%. Essentials like edible oils, pulses, and cereals have also seen steep price hikes, further eroding purchasing power.

This inflationary pressure coincides with a dampened demand environment. The festive season, traditionally a peak period for consumer spending, saw paltry volume and price growth. Fast-moving consumer goods (FMCG) companies reported tightening demand in urban markets, which account for nearly three-fourths of their sales. Entry-level passenger vehicle sales and larger commercial vehicle sales also disappointed, though rural markets offered a glimmer of hope with a modest uptick in two-wheeler sales.

The socio-economic composition of India is shifting dramatically. A report by Kantar reveals that affluent households (socio-economic classes A and B) now account for over 75% of the population, while middle and lower-middle-class households (classes C, D, and E) have shrunk to 40.1%—a 25% decline compared to five years ago.

This widening economic divide sounds a harsh reality – the middle class is being squeezed out, with stagnant wages, rising living costs, and limited access to affordable credit leaving little room for upward mobility.

Stuck Between Rising Costs and Stagnant Wages

Wage growth has slowed to a crawl, with listed companies reporting low single-digit increases. The quality of available jobs has also deteriorated significantly, as evidenced by a rise in self-employment, which now accounts for 57.7% of the workforce, up from 52% in 2018-19.

In states like Haryana and Uttar Pradesh, real wages have not just stagnated—they’ve contracted. Bihar, holds the dubious distinction of having the highest share of informal jobs in the non-agricultural sector. These roles come with no social security, no wage guarantees, and little hope for upward mobility. National Statistical Office (NSO) data confirms that job creation in the unincorporated sector slowed further in 2023-24.

Government Efforts Are Falling Short

While the government has launched various initiatives—apprenticeship programs, training subsidies, “Make in India,” corporate tax cuts, and labour law reforms—none have delivered the desired results. The jobs crisis persists, with little relief in sight.

The financial struggles of the middle class are evident across multiple metrics. Consumer demand has taken a significant hit, while net financial liabilities now outweigh household assets for many families. Housing costs have become a major burden, and regular wage growth, where jobs exist, remains negligible.

The result? A middle class that is struggling with the triple pressures of job insecurity, high costs, and stagnant incomes. For many, 2024 has been a relentless struggle to stay afloat, with little opportunity for financial recovery.

Political Choices and Economic Realities

Despite these hardships, economic concerns have not significantly influenced voting patterns in recent Central and State elections. Instead, a mix of religious fervour, nationalism, and small-scale cash transfer schemes has shaped electoral outcomes. For a large section of the population, these schemes—however modest—represent a lifeline in an otherwise bleak economic scenario.

This reliance on “benefits and schemes” has tied the ruling government to a model that prioritizes short-term financial relief over long-term structural reform. It’s a strategy that may work electorally but does little to address the systemic challenges faced by India’s middle class.

The Lingering Aftermath of Economic Shocks

It is impossible to fully grasp the depth of the damage inflicted on India’s middle class without revisiting the twin economic shocks of demonetisation and the COVID-19 pandemic. These events created gaping financial holes, leaving many households in permanent distress. Today, a significant portion of the middle and lower-middle class is hanging on by a thread, with little room for optimism about the future.

Economic challenges have deepened, societal divides have widened, and the political discourse has been increasingly fueled by hate speech and token cash transfers. These dynamics are a mirror to the troubling reality – divisive rhetoric may stoke the mind, and cash schemes may temporarily sustain the home, but neither can build a sustainable future for a nation of over 1.4 billion people.

Rural India. A Mixed Reality

The relative resilience of rural India, ironically, owes much to a policy crafted decades ago by the late former Prime Minister Manmohan Singh: the National Rural Employment Guarantee Act (NREGA). Post-pandemic, this employment safety net provided a lifeline for millions, reinforcing the enduring value of visionary policymaking. Yet, rural India remains mired in uncertainty, with over half its population reliant on the precarious agriculture sector for livelihood.

A “K”-Shaped Recovery

The economic recovery from the pandemic has sharply shown the divide between India’s haves and have-nots. The much-debated “alphabet recovery” has, in India’s case, materialised as a “K”-shaped recovery. While the affluent have rebounded with growing corporate monopolies and increasing wealth, the poorest have been left behind, grappling with long-term unemployment and widening inequality.

This economic bifurcation has not only strained the social fabric but also undermined the promise of inclusive growth that was once a cornerstone of India’s economic narrative.

The Last Bit

As we look to the year ahead, how long can a band-aid approach suffice for a nation as vast and complex as India? Quick fixes like cash transfers and piecemeal schemes cannot substitute for structural reforms aimed at job creation, wage growth, and reducing inequality.

The government must address the deep economic cleft with urgency and seriousness. Policies that focus on sustainable development, equitable opportunities, and social cohesion are the need of the hour. Divisive politics may win elections, but they cannot drive economic prosperity or social harmony in the long term.

India’s middle class cannot be dismissed as a monolithic or naïve entity, but it is undeniably in crisis. Addressing this requires more than incremental reforms or one-off schemes. It calls for bold, structural changes to create sustainable jobs, stabilize wages, and reduce the cost of living. Without these interventions, the middle class risks becoming a relic of India’s economic past rather than its foundation for the future.

As the Reserve Bank and the Finance Ministry belatedly acknowledge the country’s growth challenges, the urgency to act has never been greater. Stable liquidity, moderated lending rates, and targeted support for vulnerable segments could offer some respite.

But for now, the story of 2024 has been one of soaring loans, rising defaults, and a middle class struggling with the twin burdens of inflation and debt. For the average Indian household, it’s been a year of hard choices, tighter budgets, and dwindling hopes for financial stability and sadly the outlook for 2025 remains equally bleak.