RBI Reports Rise In Household Debt: Three Reasons Why It Is A Positive Financial Trend

The Reserve Bank of India (RBI) has reported an increase in household debt over the past three years, though it remains relatively low compared to other emerging market economies (EMEs). As of June 2024, household debt stood at 42.9 per cent of GDP at current market prices.

However, the RBI suggests that it is a positive trend for the following reasons:

One, the rise in household debt is primarily due to an increase in the number of borrowers rather than a surge in average indebtedness per individual. As of March 2024, borrowing by individuals accounted for 91 per cent of total household financial liabilities.

The report identified three main purposes for household borrowing: consumption, asset creation, and productive activities. Consumption loans include personal loans, credit card debt, and loans for consumer durables.

Asset creation loans cover mortgages, vehicle loans, and two-wheeler loans. Loans for productive activities include financing for agriculture, business ventures, and education.

Subprime borrowers primarily take loans for consumption, while super-prime borrowers use credit predominantly for asset creation, particularly housing.

The RBI noted a significant rise in per capita debt among super-prime borrowers, reflecting their growing reliance on credit to invest in assets. In contrast, per capita debt levels among other risk categories have remained stable.

Three, from a financial stability perspective, the RBI views the trend as encouraging. The report stated that “the increase in debt among highly rated borrowers, coupled with its use for asset creation, is seen as a positive development that enhances credit quality and financial resilience.”

The report emphasises the evolving borrowing patterns in India, driven by increasing financial inclusion and diverse credit needs. The data reflects a shift toward responsible borrowing and asset-building among higher credit-quality borrowers, which is expected to strengthen the overall financial system.