Rising Household Debt and Its Implications
Why in News?
Recently, the Reserve Bank of India released the Financial Stability Report (FSR) 2024, highlighting a steady rise in household debt in India.
- The report highlighted India’s growing household debt to GDP ratio.
- It has increased from 36.6% in June 2021 to 42.9% in June 2024.
Relevance:
GS-03 (Economy)
Dimensions of the Article:
- Key Highlights of the Financial Stability Report (FSR) 2024.
- Concerns and Challenges
- Way forward
Key Highlights of the Financial Stability Report (FSR) 2024
- Rising Household Debt: The household debt-to-GDP ratio increased from 36.6% in June 2021 to 42.9% in June 2024. Meanwhile, household assets declined from 110.4% to 108.3% of GDP during the same period, indicating that more borrowing is happening for consumption rather than asset creation.
- Credit Growth Trends: Total credit growth stood at 15.4% year-on-year (YoY) as of March 2024. About 66% of loans are held by prime and super-prime borrowers, reducing risky lending. While super-prime borrowers borrow mainly for asset creation, sub-prime borrowers rely more on loans for consumption.
- Rising Unsecured Loans: About 50% of sub-prime loans are for consumption, while 64% of super-prime loans are for asset creation. Credit card defaults increased from 1.8% in Sept 2023 to 2.4% in Sept 2024, while personal loan defaults rose from 3.2% to 3.9% during the same period. Low-income households are relying more on credit cards and personal loans, increasing financial stress.
- RBI’s Measures to Curb Borrowing: In September 2023, RBI raised the risk weight on unsecured loans, slowing credit expansion. Auto loan growth fell from 18.2% in March 2023 to 14.5% in March 2024 due to stricter lending norms.
- Consumption Loans Over Asset Creation: More loans are being used for consumption rather than housing, education, or business investment. This reduces spending capacity and weakens overall GDP growth.
- Rising NPA Risks: Unsecured loans are growing faster, increasing default risks. Half of the borrowers with credit card or personal loans also have home or auto loans, which means defaulting on one loan could lead to others being classified as non-performing assets (NPA).
- Fintech’s Role: The rise of digital lending and Buy Now, Pay Later (BNPL) schemes has made credit more accessible but also increased financial vulnerability. Stronger regulatory oversight is needed to prevent excessive debt accumulation.
Concerns and Challenges
- Financial Stress on Lower-Income Households: Nearly half of the loans by subprime borrowers are for consumption purposes, leading to higher default risks.
- Link Between Loan Types: Defaults in personal or credit card loans could lead to classification of other loans (like housing loans) as non-performing assets (NPAs).
- Weak Multiplier Effect: Higher debt servicing among low-income groups reduces disposable income, weakening the income multiplier effect and slowing down economic growth.
- Potential Economic Fragility: Increased reliance on unsecured loans and credit cards exposes households to financial vulnerability.
Way Forward
- Encourage Productive Borrowing: shift borrowing patterns towards asset creation rather than consumption by promoting financial literacy and better loan structuring.
- Strengthen Regulatory Oversight: Ensure strict monitoring of unsecured loans to prevent overleverage among low-income households.
- Targeted Support for Lower-Income Groups: Implement financial support and income security measures to reduce dependence on consumption loans.
- Promote Affordable Credit: Encourage low-interest loan options for housing and asset creation to balance debt structure and boost economic stability.
Prelims Question:
Consider the following statements:
- According to the Financial Stability Report (FSR) 2024, the household debt-to-GDP ratio of India increased from 36.6% in June 2021 to 42.9% in June 2024.
- Financial Stability Report (FSR) is published biannually (June & December) by the RBI.
Which of the statements given above is/are correct?
(a) Both 1 and 2
(b) 1 only
(c) 2 only
(d) None of the above
Answer: (a) Both 1 and 2 only
Related Posts
OIML Certificates
Posted on
Industrial Park Rating System
Posted on
