Rising Household Debt, Trends, Causes and Impacts

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

Trends in Household Debt

Rapid Growth Post-Pandemic

• Household debt rose from 6% of GDP in June 2021 to 42.9% in June 2024.
• Historically, it hovered around 33% between 2015–2019.

Widespread Across Income Segments

• Credit growth is not limited to affluent groups — even low-income households increased borrowing.

Sharp Rise in Personal and Unsecured Loans

• Banks’ personal loans grew by 75% (Mar 2021–Mar 2024).
• NBFCs and HFCs’ retail credit rose by 70%.
• Unsecured personal loan books grew sharply: Banks: 82%, NBFCs: ~130%.

More Loans, More Borrowers

• High number of live loans: Many borrowers have 3+ loans.
• 11% of borrowers with small-ticket personal loans (<₹50,000) are overdue.
• Borrowers with 4+ active loans are nearly at 6%.

Underlying Causes for Rising Household Debt

• Inadequate Income Growth: Between Mar 2021–Mar 2024:
  • Disposable income grew by only 43%, vs credit growth of 70–75%.
  • Consumption rose by 49%, indicating credit was used to bridge the gap.
• Low Job Creation and Wage Growth: Structural issues in employment and productivity are forcing households to borrow to maintain living standards.
• Pandemic Aftermath: Households turned to borrowing during and after COVID-19 to sustain consumption.
• Easy Availability of Credit: Aggressive lending by NBFCs, MFIs, and banks, especially in unsecured segments.
• Failed or Ineffective Initiatives:
  • RBI’s Temporary Tightening (Nov 2023): Raised risk weights on consumer credit and bank exposure to NBFCs.
    • Impacted credit growth but was short-lived due to concerns about slowing consumption.

Impacts of Rising Household Debt

• Reduced Future Consumption: Larger debt servicing eats into disposable income, reducing the ability to spend.
• Higher Defaults & Stress Signs: Rising delinquencies in NBFC portfolios: gold loans, vehicle loans, unsecured credit.
  • Increasing write-offs by banks of retail unsecured loans.
• Overdependence on Credit-Driven Growth: Private consumption is being artificially propped up by credit, not income.
• Financial Vulnerability in Low-Income Groups: Poorer households rely more on unsecured loans for essential consumption, leading to greater financial fragility.

What Needs to Be Done

Short-Term Policy Measures

• Calibrated Monetary Easing: Rate cuts + liquidity easing to be paired with caution on unsecured credit expansion.
• Strengthen Credit Monitoring: Tighten norms on multiple lending by MFIs & NBFCs.
• Improve Financial Literacy: Awareness of responsible borrowing and debt management.

Medium to Long-Term Structural Measures

• Enhance Income Growth: Focus on employment-intensive sectors (manufacturing, MSMEs, services).
  • Encourage formal job creation.
• Regulate Informal Credit Channels: Expand RBI oversight over NBFC-MFIs and introduce better credit risk profiling.
• Credit-Linked Asset Building: Redirect credit toward productive use: education, skill development, entrepreneurship.
• Revamp Social Security Nets: Ensure basic income support and employment guarantees reduce credit dependency.

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