India's Household Debt Crisis

Mains GS III - Indian Economy and issues relating to planning, mobilization, of resources.

Why in News?

Household debt has surged dramatically in the years after the pandemic.

What is the status of house hold debt in India?

• Household debt – It refers to the total amount of debt owed by households to various financial institutions.
• It is measured as a percentage of GDP (Gross Domestic Product), representing the total borrowings of households relative to the size of the economy.
• Components of household debt
  • Unsecured loans - Personal loans, credit cards, consumer durables
  • Secured loans – Housing, Gold and vehicle loans
  • Retail credit from NBFCs (Non-Banking Finance Companies) and HFCs (Housing Finance Companies)
  • Loans from microfinance institutions
• Household debt in India – It has experienced a dramatic surge in the post-pandemic period
  • 2021 - 36.6% of GDP
  • 2023 - 40.2% of GDP
  • 2024 - 42.9% of GDP

Household debt averaged around 33% of GDP between 2015-2019, indicating a significant increase in recent years.

• Credit growth – Between March 2021 and March 2024
  • Retail credit from NBFCs and housing finance companies grew by 70%
  • Loans from microfinance institutions rose by 67%
• Shift in borrowing patterns - There has been a noticeable shift towards unsecured loans for consumption rather than asset creation, particularly among lower-income groups.
• High share of personal loans - 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.

What factors contributed to rise in house hold debt?

• Structural issues in economy – The surge in household debt is a consequence of structural issues such as,
  • Inadequate job creation
  • Subdued income growth
• Low income growth – Household incomes have not grown at a pace to sustain consumption and savings.
  • Household disposable income growth - 43%
  • Bank personal loans growth - 75%.
  • Consumption growth- 49%

To slow down the credit growth and control household debt, RBI has increased risk weights on consumer credit for some segments in November 2023.

• Aggressive lending practices - Financial institutions, including banks and non-banking financial companies (NBFCs), aggressively expanded unsecured personal loans.
• Between March 26, 2021 and March 22, 2024, personal loans by the banking sector grew by 75 per cent.
• NBFCs' unsecured loan portfolios grew by approximately 130% during this period.

What are the challenges of high household debt burden?

• Financial stress on households - Greater indebtedness means a larger portion of disposable income goes toward loan repayment.
• Low private consumption – Higher debt servicing ratio leads to lower household disposable income.
• More unsecured loans – The unsecured personal loan book of banks rose by 82%, and NBFCs grew by 130%.
• Such loans were mostly availed by low-middle income class people
• This indicates that, post the pandemic, the less well-off went on a credit binge to support their consumption.

Credit binge refers to a period of excessive borrowing and spending, often characterized by a surge in credit card usage and debt accumulation.

• Multiple loan burden – Nearly 60% of personal loan customers had more than three active loans.
• In microfinance, almost 6% of borrowers had loans from four or more lenders.
• Consumption based credit - It is a matter of concern when more and more loans are taken for consumption purposes, and not for investment.
• Expanding income inequality – The debt burden appears to affect different income groups differently.
• Lower-income households (earning less than Rs.5 lakh annually) are taking unsecured loans primarily for consumption needs which may widen existing socioeconomic divides.
• Long-term financial security – The shift toward consumption loans rather than investment loans may impact households’ long-term financial security.
• Economic burden on economy – The banks have been writing off unsecured retail loans, due to increase in NPA in retail loans.
• Delinquency of loans - India's microfinance sector faces rising delinquencies due to household over-indebtedness, with 27% of borrowers taking new loans to repay old ones.
• Risk of debt trap - When debt reaches unsustainable levels, households may face sudden drops in living standards.
• Other concerns - Reduced ability to invest in education, healthcare, and other areas that affect social mobility.
• Increased financial anxiety and stress-related health issues.
• Greater dependence on credit for basic needs.

What lies ahead?

• A possible solution to deal with could lie in the Indian Bankruptcy Code.
• Government could implement stronger regulations on multiple lending to the same borrower.
• Expanding financial literacy programs to improve household debt management.
• Boosting labour-intensive manufacturing through targeted industry incentives.

Reference

The Indian Express| India's Household Debt Crisis