U.S. borrowers on lower incomes are increasingly struggling to keep up with their loan payments, according to recent data and bank executives, prompting banks to become more cautious about dishing out credit cards and car loans.

A growing number of Americans have seen their savings dwindle as rising prices squeeze budgets while interest rates stay high, bankers and economists said. The deterioration in household finances for those earning less than $45,000 contrasts with financial resilience among those on higher incomes.

Austan Goolsbee, Chicago Federal Reserve Bank President, said on April 19, that consumer delinquencies were one of the most concerning economic data points at the moment.

“If the delinquency rate of consumer loans starts rising, that is often a leading indicator things are about to get worse,” he said.

First-time and low-income borrowers are experiencing higher default rates on their loans than people with larger incomes, said Arijit Roy, who runs the consumer business at U.S. Bancorp .

At Bank of America, net charge-offs, or debts that are unlikely to be recovered, rose to $1.5 billion in the first quarter from $807 million a year earlier, mainly from credit cards, the bank reported on April 16. Rival JPMorgan Chase’s said its charge-offs nearly doubled to $2 billion in the same quarter, while they also increased at Citigroup and Wells Fargo.

Bank of America is seeing “cracks” in the finances of borrowers with below-prime credit scores whose household spending is affected by higher interest rates and inflation, Chief Financial Officer Alastair Borthwick told analysts on an earnings call.

But its customers typically have higher credit scores, and their finances are holding up well, he added.

Capital One, Old National Bank, and First Mortgage Direct are among the banks who serve more subprime customers with credit scores in the roughly 300 to 600 range, according to BankRate.

The lenders did not immediately respond to a request seeking comment.

While lenders earn money from interest payments, they seek to avoid situations in which customers fall so far behind on loans that they have to be written off.

“Banks are trying to come up with early-warning signals for customers about their bill payments, offering debt counseling and educating the customers more so that they can stay on track,” said Tom Dent, senior vice president at the Consumer Bankers Association, an industry group.

Lending caution

The burgeoning strains have prompted lenders to become more wary.

“During situations like these, many banks adopt a cautious outlook and begin to optimize their balance sheets by utilizing pricing strategies,” Mr. Roy said.

Loan volumes declined, and credit standards tightened further as banks raised borrowing costs in March, according to a survey from Federal Reserve Bank of Dallas. The poll focused on lenders headquartered in Dallas, Texas, but typically follows national trends.

Loan officers polled separately by the Federal Reserve also said they were tightening lending standards, including for credit cards and auto loans, according to a quarterly survey in January. A significant number of banks expected standards for credit cards to become even tougher.

The pullback signals loan growth — a key source of income — will be muted for conservative lenders, executives said.

Meanwhile, recent economic data have bolstered expectations that the Fed will not cut interest rates until September. The elevated borrowing costs could further exacerbate strains for stretched borrowers.

But banking giants said most consumers were in good shape.

JPMorgan CEO Jamie Dimon told analysts this month that Americans were still spending, although he noted those on lower incomes had largely used up their excess money.

“We are okay right now,” Dimon said. “It does not mean we’re okay down the road.”

Divergent consumers

Credit cards were the most notable area of weakness, while defaults on buy-now, pay-later loans were also rising, said Mark Zandi, chief economist at Moody’s Analytics.

“It is a tale of two consumers,” he said. “Back in the financial crisis, people were defaulting primarily on their mortgages but now it’s credit cards that are unsecured and have the highest rate of interest.”

Still, credit card and auto delinquency rates appear to be peaking, Moody’s said in a report earlier this month.

U.S. household debt has surged to an all-time high, and Americans have been borrowing more on credit cards, with balances crossing the $1 trillion mark for the first time last year.

Pandemic stimulus programs had burnished finances for many people who got credit cards, said Brendan Coughlin, head of consumer banking at Citizens Financial.

But financial buffers have shrunk as Americans burned through stimulus payments and loan forbearance programs ended, leaving many consumers overextended.

“Credit scores were artificially inflated with increased savings and lower spending,” said Mr. Coughlin. Credit card delinquencies are a key indicator to watch because they are “a representation of people living beyond their means,” he added.

Americans saved 3.6% of their disposable income in February, down from 4.7% a year earlier, according to U.S. Bureau of Economic Analysis data.

Overall consumer delinquencies stood at 0.98% in February across loan categories including credit cards, auto loans and mortgages, according to data from VantageScore, a credit score modeling company. It highlighted that the figure has been rising over the last few months.

Consumers on low incomes, which it defines as less than $45,000 a year, had greater financial stresses, and the group of U.S. borrowers with the highest credit scores is shrinking, the data showed.

Younger Americans are also more likely to be delinquent than the over-40s, the data showed.

 The aim will be to ‘prevent volatility or volatile inflows’ but ‘never’ to restrict outflows, says Somanathan. 
| Photo Credit: AFP

India will monitor flows of foreign funds after its inclusion into JPMorgan’s emerging market debt index and take steps to avoid ‘hot money’ that can trigger volatility in currency and bond markets, a senior government official said.

“We will keep monitoring it. And when necessary, steps will be taken,” T. V. Somanathan, a senior Finance Ministry official told Reuters in an interview.

The aim will be to “prevent volatility or volatile inflows” but “never” to restrict outflows, Mr. Somanathan said, adding all possibilities are open to keep volatility in check.

However, any talk about measures right now is “hypothetical.”

Last year, JPMorgan announced it will include some Indian bonds in the Government Bond Index-Emerging Markets and its index suite from June, which could lead to incremental inflows of around $23 billion.

Jump in foreign investmentsin 3 months

Foreign investment in Indian government bonds jumped in the last three months, when investors bought securities worth ₹446 billion ($5.37 billion).

Mr. Somanathan said the government’s main concern with index investors was that some of these longer-term investors “come in passively and leave passively” and the exit does not always reflect economic conditions on the ground.

On government’s borrowing, Mr. Somanathan said New Delhi was likely to raise nearly ₹200 billion through sovereign green bonds in 2024/25 fiscal.

“Within that total borrowing programme, some component is likely to be green bonds. Likely to be around the same level as last year but a final decision has not been taken.”

JPMorgan Chase & Co. will add Indian government bonds to its benchmark emerging-market index, a keenly awaited event that could drive billions of foreign inflows to the nation’s debt market.

The decision is the latest sign of India’s growing appeal to international investors as the country’s economic growth outstrips peers, its geopolitical influence grows and global companies including Apple Inc. look for alternatives to China. While foreigners play a small role in the Indian bond market, inflows have been picking up in recent years and the country’s assets have proven resilient to financial turbulence that has roiled other developing-nations.

The index provider will add Indian securities to the JPMorgan Government Bond Index-Emerging Markets starting June 28, 2024. The South Asian nation will have a maximum weight of 10% on the index, according to a statement Thursday.

Index inclusion follows “the Indian government’s introduction of the FAR program in 2020 and substantive market reforms for aiding foreign portfolio investments,” the team led by the firm’s global head of index research, Gloria Kim, said in a statement. Almost three-quarters of benchmark investors surveyed were in favor of India’s inclusion in to the index, they said.

India’s milestone is a stark contrast to many emerging-market peers, not least neighboring China, whose economic woes and struggling financial markets have become a source of frustration for global investors. In fact, those troubles have only burnished India’s appeal.

Foreign investors have bought $3.5 billion worth of Indian government debt this year, according to data compiled by Bloomberg. Giving global investors greater access may prompt flows of as much as $30 billion, according to HSBC Holdings Plc in a recent note.

On the equities side, India has been as one of the top investment destintions among major emerging markets this year, with its fast-growing economy and solid corporate earnings pushing the nation’s equity benchmark near an all-time high. Developing-market money managers are most overweight on India in their Asia portfolios, Goldman Sachs Group Inc. analysts wrote in a report earlier this month.

While concerns over rising oil prices and higher-for-longer US interest rates have spurred outflows from local shares in September, overseas investors have bought almost $16 billion on a net basis this year. That’s set to be the biggest annual inflow since 2020.

“With inflation coming under control, the inclusion will open more gates for foreign capital to flow into India,” said Charu Chanana, a strategist at Saxo Markets in Singapore.

Expectations that India may be added to international gauges had been rising in recent months as providers look to diversify index constituents. Russia’s invasion of Ukraine had seen it drop off indexes, while China’s worsening economic woes have taken the shine off the country’s sovereign debt.

That left India as the world’s last big emerging market that hasn’t joined others like China on the global debt indexes. Assets worth $236 billion track the JPMorgan emerging market bond indexes, the company said.

Still, authorities in India have been largely uncompromising in making changes to tax policies that would make it easier for the securities to be added to global indexes. Korea, another large emerging market, signed an agreement to open an omnibus account with Euroclear Bank SA, facilitating foreigners’ access.

Currently, 23 bonds worth a combined notional $330 billion are eligible to be added into the index, JPMorgan said. Inclusion will be staggered over 10 months at roughly 1% weight per month, it said.

Foreigners have raised their holdings of such bonds to almost $12 billion, from $7.4 billion at end of 2022, in anticipation of the inclusion, according to Clearing Corp. of India data. The rupee was trading 0.4% higher in offshore trading early Friday, with the bond market yet to start trading.

FTSE Russell, another major index provider, has the nation’s bonds on index watch for inclusion in its emerging market gauge.

Elsewhere, Egypt has been placed on negative watch due to the material currency repatriation hurdles reported by investors, JPMorgan said. The country’s index eligibility will be assessed over the next three to six months, it said.

Bloomberg LP is the parent company of Bloomberg Index Services Ltd, which administers indexes that compete with those from other service providers.