Watch Out: India’s Aadhar And The Consumer Credit TsunamiDecember 28, 2012 3:57 am
If you have ever been to India or you happen to live there, you will appreciate one fact: the preference of cash over credit for a very big proportion of transactions. Here are some statistics, to set the context right:
1. There are about 20 million credit cards in the country (Population: 1.2 billion). In comparison, there are about 300 million debit cards. (Source). People are spending more on credit cards, but the overall reach is very limited.
2. More importantly, India has some stunning demographic advantages: India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. (Source).
3. India currently adds 40 million people to its middle class every year. Analysts such as the founder of “Forecasting International”, Marvin J. Cetron writes that an estimated 300 million Indians now belong to the middle class (Source) – that is the addressable population.
So that is the context: 20 million credit cards to an addressable population of 300 million, increasing at the rate of 40 million every year. There are two reasons for this disparity:
1. Across many sections in India, spending on credit is not viewed favorably, purely from a cultural standpoint. It is basically a discipline thing, particularly in the middle class, that makes ‘debt’ a dirty word – using a credit card is viewed as ‘spending money that you do not have’.
2. User Tracking and Credit History: India does not have an SSN equivalent, and while attempts are underway to get credit scores for people, these are in early stages.
And here is our hypothesis: Aadhar will address reason 2 (tracking) and the western influence that comes with globalization and media will address reason 1. Aadhar particularly, will solve a huge pain point for the banking system overall: uniquely identifying people, and tracking their transactions. For the first time, there will be a way to assign a functional credit score to individuals.
When both these reasons cease to exist, we expect a credit tsunami to originate in India. In big cities, the ‘credit’ change is already happening – and in big ways – credit card spends 30 times more than debit card (Source)
Watch out, there is a consumer credit tsunami originating in India in the next 3 years. And given the way the global economy is wired, you will feel the impact, regardless of where you are. When this ‘cash nation’ turns into a ‘credit card nation’ – when the Great Indian Middle Class starts swiping Visas and Mastercards – you will need to buy datacenters on Mars to handle the traffic.
[Note: For some reason, this article has been interpreted by many folks as 'Credit Tsunami is good for India' - whereas the intended messaging was just this: the sheer scale of credit that would originate from India in the next 3-4 years cannot be ignored.]