The Reserve Bank of India (RBI) has acknowledged a rise in household debt over the past three years, but emphasized that India's debt levels remain relatively low when compared to other emerging market economies (EMEs). As of June 2024, household debt in India stood at 42.9% of GDP, a notable increase from previous years, but still below the average seen in other emerging markets.
The report pointed out that while the overall household debt has risen, this trend is largely due to a higher number of borrowers rather than an increase in the average debt per individual. As of March 2024, borrowing by individuals accounted for 91% of total household financial liabilities. The primary drivers of borrowing include consumption (such as personal loans, credit card debt, and consumer durables), asset creation (including mortgage, vehicle, and two-wheeler loans), and productive activities like loans for agriculture, business, and education.
A key finding of the RBI's report was that nearly two-thirds of the loan portfolio belongs to borrowers with prime or higher credit quality. Borrowing patterns varied significantly across risk categories. Subprime borrowers typically took loans for consumption, while super-prime borrowers used debt for asset creation, particularly in housing. Notably, the rise in per capita debt was most pronounced among super-prime borrowers, indicating their increasing use of credit to invest in assets.
From a financial stability perspective, the RBI views this trend as positive. The increase in borrowing among higher-rated borrowers, combined with the fact that much of this debt is being used for asset creation, is seen as a sign of improved credit quality and financial resilience. This shift in borrowing patterns is also seen as a reflection of greater financial inclusion and the diverse needs of India's growing middle class.
While household debt has risen, the RBI's analysis suggests that the overall financial system remains resilient, with a growing emphasis on asset creation rather than consumption.
