Indian households, which are already scaling back on bank borrowings, may become more cautious in levering up, tempering expectations of a demand-led recovery in the world's fifth-biggest economy.

Boosting credit demand remains the biggest challenge as India resumes economic activity after several weeks of lockdown due to the local outbreak of COVID-19. Banks are awash in liquidity after a series of rate cuts by the Reserve Bank of India and other measures by the authorities to revive the economy that is expected to slip into contraction this year.

"Retail credit had been growing but as we get deeper into this year, it will be flattish because people will tend to save a larger proportion of their income than in the past," said Dharmakirti Joshi, the chief economist at CRISIL Ltd., part of S&P Global Inc. "You typically don't borrow in uncertain times, you preserve your savings."

Data from the central bank show that Indians are growing their financial assets faster than taking on liabilities. The households' financial assets rose to 15.62 trillion Indian rupees, or 7.7% of national GDP, in the fiscal year ended March 31, according to a report published by the Reserve Bank of India on June 10. That compared with 13.73 billion rupees of assets, or 7.2% of GDP, held by households in the previous fiscal year.

The increase in assets was mainly because Indian households' borrowing declined to 6.01 trillion rupees in the fiscal year, from 7.50 trillion rupees in the previous year. The aggregate size of the borrowings fell to 2.9% of GDP in the fiscal year ended March 31, from 3.9% in the previous year, according to the report.

Financial assets of households include cash, deposits, mutual fund and pension fund investments and small savings. Liabilities comprise borrowings from banks, nonbanking financial companies and housing finance companies.

Major financial resource

The household sector contributes about 60% of gross savings in the Indian economy and is a major financial resource for investments. "Its role is likely to become critical in the context of the policy effort gathering critical mass to lift the Indian economy from the vise-like grip of a slowdown and, more recently the life-threatening COVID-19 pandemic," RBI executives wrote in the report, which the central bank said was not its official view.

The slower credit off-take from nonbank and housing finance companies was a factor in slowing household loans, said Sameer Narang, the chief economist of Bank of Baroda, who is more optimistic about the return of growth in retail.

"In other economies where the infection [curve] has flattened, life has resumed. I would reckon a similar trajectory in India," Narang said. However, he expects Indian households to buy more of financial assets at the expense of physical assets, such as real estate.

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The growth in loans by individuals eased to 12.1% on year in April, from 15.0% in the fiscal year that ended on March 31, according to RBI data.

"It is fair to comprehend that it's a demand issue as of now," Sandeep Upadhyay, CEO of Centrum Infrastructure Advisory, told S&P Market Intelligence. Even with improved liquidity, "consumers are skeptical about their discretionary spend, fearing the worst is yet to come," Upadhyay said, adding that he expects the trend to continue till the end of 2020 before a "probable bounce back" in the first quarter of 2021.

The decline in consumer sentiment and a "significant hit" on consumption demand and spending will likely hit the retail credit market as consumers cut discretionary expenses, according to a June 11 report by credit information provider TransUnion Cibil.

"Unlike [in] the last recession, we anticipate demand for products that provide much needed liquidity like credit cards and personal loans will remain moderate as consumers look to secure funds to bridge any personal finance gap," said Abhay Kelkar, vice president of TransUnion Cibil. However, the demand for secured lending products such as auto and home loans will likely remain weak for some time, Kelkar said.

As of June 11, US$1 was equivalent to 76.08 Indian rupees.