Context: The Financial Stability Report (FSR) 2024 by the RBI highlights the rise in household debt and its implications on financial stability and economic growth.
Relevance of the topic:
Prelims: Questions on economic indicators like GDP, inflation, household debt, and financial stability.
Mains: Impact of debt on economic growth, financial inclusion, and inequality.
Major Highlights:
1. Rising Household Debt:
- Household debt-to-GDP ratio increased from 36.6% (June 2021) to 42.9% (June 2024), while household assets declined.
- Debt growth driven by increase in number of borrowers, not rising indebtedness per borrower
- Sub-prime borrowers are decreasing; two-thirds of debt now belongs to prime and super-prime borrowers
2. Shift in Borrowing Purpose:
- Shift in borrowing patterns—greater unsecured loans for consumption (than asset creation), particularly among low-income groups.
- Super-prime borrowers: 64% of loans used for asset creation.
- Sub-prime borrowers: Nearly 50% of loans used for consumption.
- Lower-income groups rely more on unsecured credit (credit cards, personal loans).
3. Increasing Financial Stress for Lower-Income Households:
- Higher delinquencies in credit card and personal loans since September 2023.
- Unsecured debt defaults can impact secured loans (housing, vehicle loans).
- Financial stress among low-income groups can weaken economic stability.
Challenges:
- Macroeconomic Weakness: High household debt can lower economic growth.
- Financial Marginalisation: Low-income households are burdened with debt, reducing their ability to spend.
- Credit Risks: Increase in non-performing assets (NPAs) due to defaults in unsecured loans.
- Decline in Income Multiplier Effect Poor households spend more of their income, but debt servicing reduces consumption, impacting economic growth.
- Role of Financial Innovations: Growth in unsecured loans raises concerns over financial stability.
Benefits:
- Increase in Credit Access: More individuals now have access to credit.
- Better Borrower Profiles: More lending to prime and super-prime borrowers.
- Control Measures by RBI: Recent steps have slowed credit growth, reducing risks.
The policy will have to remain awake to the possible sources of fragility engendered by the increase in consumption loans and the proliferation of unsecured forms of consumer credit.
When will compass be released?