Opinion Indian households have a debt problem

Take a look at the numbers. Between March 26, 2021 and March 22, 2024, personal loans by the banking sector grew by 75 per cent. Over the same period, retail credit extended by non-banking finance companies and housing finance companies grew by 70 per cent, while loans from microfinance institutions rose by 67 per cent. In comparison, during this period, household disposable income grew by 43 per cent and consumption by 49 per cent.

Had it not been for this surge in debt, and if household borrowings over these years had been in line with past trends, then private consumption would have been lower by around 2 percentage points of GDP or savings would have fallen. This would have had knock-on effects on the entire economy. Put differently, household incomes have simply not grown at a pace to sustain consumption and savings at such levels.

In itself, borrowing is not a bad thing. But it is a matter of concern when more and more loans are taken for consumption purposes, and not for investment. These consumption loans are also largely unsecured. Between March 26, 2021 and March 22, 2024, the unsecured personal loan book of banks (personal loans, credit cards and consumer durables) rose by 82 per cent, while that of NBFCs grew by roughly 130 per cent. Such loans tend to dominate the borrowings of the less well-off — as per the RBI, generally those with less than Rs 5 lakh per annum in income. This only indicates that, post the pandemic, the less well-off went on a credit binge to support their consumption, while the more affluent, who also borrowed heavily, did so to accumulate assets like houses and cars.

But not only are more households taking on debt, they are also taking on more debt than before. As per the RBI, 11 per cent of borrowers with a personal loan of less than Rs 50,000 had an overdue personal loan. In the second quarter of 2024-25, nearly three-fifths of customers who have availed of a personal loan had more than three live loans. In the case of microfinance, the share of borrowers availing loans from four or more lenders was at almost 6 per cent in September 2024.

Greater indebtedness implies that loan repayment will account for a bigger portion of household disposable income. And unless incomes grow rapidly, the burden of repayment will eat into disposable incomes, impacting spending capacity.

It is not as if this credit binge went unnoticed. In November 2023, the RBI introduced various measures — increasing the risk weights on banks’ exposure to NBFCs and on consumer credit for some segments — to slow down credit growth. However, with growth slowing down sharply — the hit to consumption reflects in the commentary from India Inc — the central bank has now reversed its stance partially. The RBI seems to believe that by lowering the risk weights on lending, cutting interest rates and flooding the system with liquidity, it can spur private consumption. However, this view is based on the assumption that the weakness in the economy is largely a consequence of policy tightening.

Lower rates — perhaps a 50 basis points cut in this meeting and a 100 basis points cut over this entire cycle, along with the easing of the liquidity situation, bringing down the call rate below the repo rate — should ideally help spur consumption. But the question is: Considering current debt levels and sluggish income growth, to what extent can already over-leveraged households take on more debt to boost consumption? After all, the existing debt has to be repaid. And subdued income growth makes it difficult for households to take on more debt. More so, when there are already signs of stress, of some households having difficulty paying back their loans.

Take NBFCs. Loans that are overdue for more than 90 days are estimated to be inching upwards. Delinquencies are increasing in gold loans, and asset concerns are arising in the personal and consumer finance segment, and also in the passenger vehicle and two-wheeler segments. In the case of MFIs, loans that are due for 31-180 days have risen considerably in recent months. Banks have also been steadily writing off unsecured retail loans, indicating a worsening of asset quality.

Moreover, with lenders themselves becoming more cautious, to what extent will they be comfortable lending to already overextended households? As of January 25, 2025, the personal loan book of banks was roughly a third of all credit extended. It is greater than loans to the services sector, industry and agriculture individually. In the case of NBFCs and HFCs, retail loans are more than half of the entire loan book.

This surge in household debt is a reflection of the underlying problems in the economy. It is a consequence of structural issues, of inadequate job creation and subdued income growth. The policy response should be appropriately crafted.

ishan.bakshi@expressindia.com