Risky borrowing: India's household debt has likely surged to all-time high

India's rising household debt, particularly the increase in non-housing loans, is a cause for concern for the central bank.

India's household debt likely surged to a record in the final three months of 2024, with signs that consumers are boosting riskier borrowing, which has been a worry for the Reserve Bank of India. 

Household debt touched a new high of 39.1% of gross domestic product in the October-December quarter, up from 36.7% a year ago, estimated economists Nikhil Gupta and Tanisha Ladha of Motilal Oswal Financial Services Ltd in a report earlier this week. The figures are higher than the previous peak of 38.6% in the Jan-March period of 2021.

And while  household debt is estimated to have reached a new peak, non-housing loans grew faster than housing loans for the sixth successive quarter in the third quarter of FY2024.

 

What does this mean?

Within the non-government non financial debt, household debt is a key concern. It jumped by a significant 16.5 per cent on year, driven primarily by non-housing loans. This has pushed household debt to a new peak of 39.1% of GDP. This means that Indian households owe a larger portion of their total income (GDP) as debt than ever before.

Riskier borrowing: The report highlights a concerning shift towards riskier non-housing debt. This type of debt, used for consumer goods or discretionary spending, grew faster (18.3% YoY) than housing loans (12.2% YoY). This suggests Indians might be borrowing more for non-essential purchases.

Data from CRIF High Mark, a leading Indian credit bureau, also showed that the festive quarter between October 2023 to December 2023 has seen a spurt in consumer lending segments like Auto Loans, Two-Wheeler Loans, Personal Loans, Consumer Durable Loans, and Home Loans.

Consumer durable loans witnessed a significant surge of 27.1% in originations (value), likely fueled by festive season discounts on electronics and appliances. The average ticket size also grew by 16.3%. Personal loans increased by 13% in originations (value) and witnessed a 22.3% growth in volume. Interestingly, there was a shift towards smaller ticket loans, with an average ticket size dropping 8%.

CRIF High Mark report

The CRIF report highlights that the top 10 states contributed to 72% of overall originations(value) in Q3 FY24 for these five major consumer lending products. Among these top 10 states, originations (value) were highest in Maharashtra for auto loans, personal loans, consumer durable loans, and home loans and in Uttar Pradesh for two-wheeler loans. Kerala replaced Madhya Pradesh as 10th largest state by originations (value) in Q3 FY24

Concerns for RBI: This trend worries the Reserve Bank of India (RBI) for several reasons:

Financial stability: A rapid rise in unsecured loans could lead to bad debt if borrowers struggle to repay. This can strain banks' finances and threaten the overall stability of the financial system.

Reduced lending capacity: Banks with high levels of bad debt have less money to lend for productive purposes like business investments, potentially hindering economic growth.

Comparison with other countries: While India's housing debt is relatively low compared to some nations, its non-mortgage household debt is already on par with developed economies like Australia and Japan. This raises concerns about potential over-borrowing.