HOW MUCH IS THE DEBT?

India’s household debt has become a growing concern, with recent data showing a significant rise in borrowing. By June 2024, household debt reached 42.9% of GDP, as reported by the Reserve Bank of India (RBI) in its Financial Stability Report (December 2024), a sharp increase from 37.6% in March 2023 and well above the pre-pandemic average of 33% (2015-2019). 

The government’s push for financial inclusion has increased credit access, but without addressing income inequality or job creation, it risks creating a debt trap.

Using India’s nominal GDP for FY 2024-25, estimated at ₹331.7 lakh crore (based on Ministry of Statistics projections), this translates to ₹141.9 lakh crore in June 2024.

Personal loans, a subset of this debt, grew 24% annually between March 2023 and June 2024, totaling ₹54.9 lakh crore, or 33% of Scheduled Commercial Bank loans. The increase is largely driven by more people accessing credit (over 50% of the rise), with only a third due to higher per capita debt, reflecting financial inclusion efforts.

Super-prime borrowers, whose per capita debt rose 25% from March 2022 to June 2024, account for much of this, using 70% of their loans for asset creation (e.g., housing, vehicles), which the RBI views as financially stabilizing. India’s debt service ratio remains low at 6.5-7.0%.

WHAT IS DEBT SERVICE RATIO?

Debt Service Ratio (DSR) is a measure of the share of income that households or entities use to repay debts, including both interest payments and principal repayments.A high DSR means households are spending a large part of their income repaying loans, leaving less for essential spending.

CONSUMPTION LOANS A CONCERN?

However, concerns emerge with consumption loans, which have risen since 2019, especially among sub-prime borrowers (50% of their loans are for consumption vs. 31% for super-prime). This trend, spurred by earlier RBI policies reducing risk weights on consumption loans, led to higher delinquency risks.

The RBI reversed this in November 2023, increasing risk weights, which slowed personal loan growth to 12% by January 2025. The article suggests that while the debt rise isn’t alarming due to its asset-driven nature and low debt service ratio, the growing reliance on consumption loans among riskier borrowers signals potential vulnerabilities in India’s financial stability.

How India’s Household Debt Is Created?

Household debt in India comprises loans from banks, non-banking financial companies (NBFCs), and informal sources, including housing loans, personal loans, credit card debt, vehicle loans, consumer durable loans, and loans for agriculture, business, and education. The rapid rise since the Covid-19 pandemic is driven by structural, behavioral, and economic factors, with updated trends providing further insight:

Surge in Housing Loans

Housing loans remain the largest contributor, making up over 50% of retail loans (Care Edge Ratings, September 2024). This trend persists into 2025, with households investing in real estate as a form of long-term security, despite stagnant incomes for many. The cultural aspiration for homeownership, combined with government schemes like PMAY (Pradhan Mantri Awas Yojana), continues to fuel this debt, though rising interest rates on housing loans may strain borrowers. Care Edge Ratings notes that this debt is often productive, contributing to asset creation and supporting public infrastructure development. However, the rapid growth in mortgages—up 12.2% year-on-year in Q3 FY24—has significantly increased overall household leverage.

Rise in Unsecured Loans and Consumption Borrowing

There has been a notable shift toward unsecured loans (e.g., personal loans, credit card debt, consumer durable loans), which grew by 18.3% year-on-year in Q3 FY24 but slowed to 12% by January 2025 after RBI interventions. Despite the slowdown, these loans remain a concern, especially for sub-prime borrowers, with 50% of their loans for consumption. Between March 2021 and March 2024, personal loans by banks grew by 75%, and NBFCs saw a 130% increase in unsecured loan portfolios.

This trend is pronounced among lower-income groups, who borrow for consumption (e.g., electronics, weddings, health emergencies), increasing delinquency risks. Microfinance delinquencies rose, with the portfolio at risk (PAR) for dues over 180 days increasing from 7.3% to 9.7% between December 2023 and December 2024, reflecting over-indebtedness, with 27% of borrowers taking new loans to repay old ones.

Post-Pandemic Economic Pressures

Post-Covid, household debt surged from 36.6% of GDP in June 2021 to 42.9% by June 2024. The pandemic eroded savings, with net financial savings dropping to a 47-year low of 5.3% of GDP in FY24, though this improved to 7.3% in H1 FY25. The earlier drop forced households to borrow for consumption, especially as income growth remained sluggish. 45% of borrowers are now sub-prime, with half their loans for daily expenses, driven by food prices doubling over the past decade and stagnant incomes. The availability of low-interest loans post-pandemic encouraged borrowing for both consumption and asset creation, such as homes and vehicles.

Aggressive Lending Practices

Banks and NBFCs aggressively expanded credit, with NBFC unsecured loan portfolios growing 130% between March 2021 and March 2024. Between March 2021 and March 2024, retail credit from NBFCs and housing finance companies grew by 70%, partly fueled by RBI’s earlier reduction of risk weights on consumption loans in 2019, though later reversed in 2023 due to rising delinquencies.

The RBI’s partial reversal of risk weights in February 2025 aims to ease lending, but this could reignite debt growth, especially in consumption loans. Microfinance institutions also contributed, with 27% of borrowers taking new loans to repay old ones, signaling over-indebtedness.

Economic and Structural Issues

1. Subdued Income Growth: The sluggish income growth, especially among lower-income households (earning less than ₹5 lakh annually), has forced families to borrow for survival, exacerbating debt levels.

2. Income Inequality: Debt is disproportionately concentrated among lower-income and informal sector workers, who lack access to formal credit and social protection, increasing their financial stress. This debt surge impacts sectors like automobiles, consumer durables, and real estate, with FMCG firms reporting lower urban spending.

3. Consumption-Driven Borrowing: A growing share of loans (50% for sub-prime borrowers vs. 31% for super-prime) is for consumption rather than asset creation, raising concerns about long-term financial security.

4. Informal Lending: In rural areas, 31% of household loans come from informal lenders often carrying high interest rates and trapping borrowers in debt cycles, likely understating official debt figures.

Cultural and Aspirational Shifts

The aspirational Indian consumer, particularly younger urban professionals, is increasingly borrowing to fund lifestyle expenses, education, and health emergencies. The rise in SIP contributions to ₹26,688 crore in May 2025 shows financial awareness, but many still borrow to bridge income gaps, as savings remain low at 18.4% of GDP.

The updated estimate of ₹149.9 lakh crore reflects a worrying trend, with household debt reaching 48.6% of GDP by March 2025. The RBI asserts that India’s debt levels are manageable compared to other emerging markets (42.9% vs. an average of 48.3% in June 2024), and the debt service ratio (6.5-7.0%) is among the world’s lowest.
 

If unchecked, this trajectory could mirror China’s, where household debt reached 62% of GDP, raising concerns about economic stability. It could also lead to a broader economic slowdown, as seen in subdued consumption  challenging the narrative of a robust recovery.