Context: The Reserve Bank of India’s (RBI) latest Financial Stability Report signals a K-shaped growth of household debts in India. There is a rise in retail debt driven by consumption loans, while the asset-creating loans are shrinking.
Relevance of the Topic: Prelims: Household Debts- Trends
What are Household Debts?
- Household debt is defined as all liabilities of households (including non-profit institutions serving households) that require payments of interest or principal by households to the creditors at a fixed date in the future.
- Debt is calculated as the sum of the following liability categories:
- Loans
- Mortgage loans
- Consumer credit (personal loans, credit card debt)
- Other accounts payable (outstanding bills and dues).
- Loans
- Household debt is typically measured as a percentage of net household disposable income (NHDI).
Trends in Household Debts in India
- Rising Household Balance Sheet Stress:
- Current household debt has increased significantly to about 43% of GDP from 35% of GDP in March 2020.
- K-shaped Credit Market: Consumption loans vs. Asset creating loans
- Subprime borrowers (those with lower credit-worthiness) are primarily taking on consumption loans. (E.g., personal loans, credit card debt etc.)
- Wealthier households are taking on leverage to buy assets. (E.g., house)
- This suggests a K-shaped credit market.
- The upper arm of K represents wealthier households benefiting from productive credit and asset creation.
- The lower arm of K represents vulnerable households taking loans for consumption expenditure, which is unsustainable in future.
- Credit History of Households:
- Approximately 60% of those taking on personal loans had more than three active loans.
- Retail Loan Stress:
- Increased reliance on personal loans risks higher delinquency rates, particularly in unsecured credit and microfinance.
- Banks and non-banking financial institutions (NBFCs) are reporting increased write-offs indicating financial distress among borrowers and poses challenges in credit recovery.