Household debt a grave danger: Sundaresan

Household debt has doubled as much as income in most developed countries over the last 25 years as financial intermediaries like banks were focusing on the household sector, but this had sharply raised the risk profile of the sector, Suresh Sundaresan, Chase Manhattan Bank professor of finance and economics of Columbia University, said here.

Delivering the first of the 'distinguished alumnus lecture' organised by the Indian Institute of Management, Calcutta (IIMC), Sundaresan explained that with credit disintermediation picking up all over the world, financial institutions (FI) were handling the funds in an efficient manner but this was posing threats.

"FIs are focusing much more on household sector and with the credit disintermediation, common people are getting exposed to institutional credit risk in an unprecedented scale," said Sundaresan while speaking on the topic 'Consumer and Corporate Defaults: Lessons from Asia and Western Hemisphere'.

Corporate were exposed to limited liability but households were much more vulnerable, particularly to any major recessional shock in the economy in such a framework.

Sundaresan, while analysing the credit risk exposure of Indian households, said, "The country must take a lesson from experience of South Korea which could not sustain the recession shock just after a similar phase, when the banks were selling credit cards to households in leaps and bounds."

He said the economy needed to maintain a high rate of growth to sustain the leverage imposed on households by creditors.

"Being much more vulnerable to any negative shock in any of the major economic variables like interest rate, income, the negative impact is manifold whenever the household sector is exposed enormously to credit risk and in such case there is a very high chance of default," he warned.