Advice for Indians in light of Household Debt Bubble

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 The Great Indian  – Fact or Fiction?

1. Rising Household Debt in India

  • Household debt rose to 42.9% of GDP (June 2024), up from 37.6% (March 2023).
  • Personal loans surged by 24% during this period, totaling ₹54.9 trillion, or 33% of total bank credit.

2. Key Drivers of Debt Growth

  • Expansion in borrower base due to increased financial inclusion.
  • Majority of new borrowing from super-prime borrowers (high credit scores), with 70% of their loans used for asset creation (housing, education, business).
  • The Debt Service Ratio (DSR) remains moderate at 6.5–7%, signaling manageable repayment levels.

3. Areas of Concern

  • Rising share of consumption-driven loans, particularly among sub-prime borrowers.
  • Microfinance sector shows stress:
    • Delinquency rates (PAR >180 days) rose from 7.3% to 9.7% in 2024.
    • RBI’s stricter risk norms (Nov 2023) temporarily slowed credit growth.

4. RBI’s Policy Responses

  • Tightened norms for personal loans and credit cards to curb unsecured lending.
  • Eased credit conditions for NBFCs and microfinance institutions (Feb 2025) to maintain credit access.

5. Conclusion: Bubble or Not?

  • No bubble yet, but vulnerabilities exist:
    • Unsecured loans taken by riskier borrower segments.
    • Rising defaults in microfinance.
  • Asset-backed, productive borrowing by super-prime borrowers remains stable and healthy.

Recommendations for Indian Households

1. Borrow Smartly

  • Focus on productive loans (housing, education, business).
  • Keep your EMI-to-income ratio under 30–40% to avoid over-leverage.

2. Maintain Credit Discipline

  • Regularly monitor your CIBIL score (750+).
  • Avoid frequent or multiple loan applications—they can hurt your credit profile.

3. Be Cautious with Small & High-Interest Loans

  • Unsecured and high-interest loans (credit cards, microfinance) can spiral into debt traps.
  • Pay off high-cost debt first.

4. Build an Emergency Fund

  • Set aside 3–6 months of expenses in liquid savings or FDs to manage unexpected financial shocks.

5. Stay Aware of Policy Changes

  • Track RBI interest rate trends—lower rates can reduce borrowing costs; plan big loans accordingly.

6. Improve Financial Literacy

  • Use budgeting tools and financial planners to monitor income and spending.
  • Invest wisely—ensure that your assets grow faster than your liabilities.

Final Takeaway

India’s household debt is rising but still largely under control. Most borrowing is productive and asset-backed, especially among creditworthy borrowers. However, the uptick in unsecured consumption loans and microfinance defaults demands caution. Indian households should borrow prudently, avoid overexposure to high-cost loans, and focus on long-term financial health.


Ref : https://www.financialexpress.com/business/industry-insights/the-great-indian-household-debt-bubble-fact-or-fiction/3803300/


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