The worrying rise of personal, credit card and gold loans in India

New Indian Express

2 days ago

Indian households are running into debt like never before.
Alarmingly, household debt as a percentage of GDP has doubled in the past one decade. According to the RBI's latest Financial Stability Report released Monday, the household debt-to-GDP ratio stood at 41.9% (at current market prices) as on December 2024, as against 26% in June 2015.
The good news, though, is that the debt burden has reduced from 42.9% in June 2024 to 41.9% as of December 2024. Moreover, Indian households' debt-to-GDP ratio is relatively low compared to other emerging market economies, which stood at 46.6%.
But what's more concerning is the fact that households are loading up on destructive debt such as personal, credit card and gold loans, than constructive credit, which includes housing loans.
On last count, non-housing retail loans—mostly used for consumption—accounted for a lion's share of 54.9% of total household debt as on March 2025 and 25.7% of disposable income as on March 2024.
In other words, about Rs 55 out of every Rs 100 that banks and financial institutions are lending to individuals is going towards credit cards, consumer durable loans and all other personal loans, which have steep interest rates. Still, the share of these loans has been growing consistently over the years, and their growth has outpaced that of both housing loans and agriculture and business loans, according to RBI.
Broadly, retail loans can be divided into three major categories—non-housing retail loans, housing loans and credit extended to individuals in their personal capacity, but utilised for either personal or business purposes.
As on December 2024, if housing loans comprised 29% of total household debt, non-housing retail loans and agriculture and business loans accounted for the rest at 54.9% and 16.1%, respectively.
Analysts also warn against the explosion of the riskiest slice of the credit market comprising sub-prime and near-prime personal loans, particularly amid rising living costs, stagnant wages and inflation.
While non-housing retail loans are seeing an unprecedented increase in the recent past, the component of housing loans to overall household debt, on the other hand, has reduced from about 36%-37% in FY19 to 29% as on December 2024.
Perhaps driven by the rush of non-housing retail loans, consumer segment loans grew at a CAGR of 20.4% between March 2021 and March 2025, as against 14.6% growth seen in overall bank credit. Disaggregated data shows that incremental growth has been mainly driven by existing borrowers availing additional loans, and their share has increased to more than a third of the housing loans sanctioned in March, 2025.
Moreover, as RBI's latest report noted, the share of borrower accounts with loan-to-value (LTV) ratios greater than 70% is also rising, and delinquency levels are greater for lower-rated and highly leveraged borrowers. However, these have declined significantly from the levels seen during COVID-19.
Sensing danger, the RBI has repeatedly flagged heightened risks in the unsecured lending segment and cautioned lenders to remain vigilant, while offering personal loans for consumption purposes. In fact, in November 2023, fearing a rise in bad loans, the central bank raised capital to risk-weighted asset ratios for both banks and NBFCs to 125%. Consequently, retail loan disbursements have slowed following the implementation of regulatory measures across lender types, product types and credit-active consumers.
At an aggregate level, the per capita debt of individual borrowers has grown from Rs 3.9 lakh in March 2023 to Rs 4.8 lakh in March 2025. The rise in per capita debt has mainly been led by the higher-rated borrowers.
The share of better-rated customers among total borrowers is growing, both in terms of the outstanding amount and the number of borrowers. This is important from a debt serviceability and financial stability perspective, as it indicates that household balance sheets at an aggregate level are resilient, the RBI noted.
Higher debt may help boost consumption, but it could be detrimental to economic growth. As a 2017 BIS study (which used data on 54 economies over 1990-2015) revealed, household debt boosts consumption and GDP growth in the short run but mostly within one year. In the longer run, however, a one percentage point increase in the household debt-to-GDP ratio tends to lower growth by 0.1%. The negative long-run effects on consumption intensify as the household debt-to-GDP ratio exceeds 60%.
Households' debt burden is rising even as the growth in household savings fell with a thud to 5.3% of GDP in FY23 -- a 47-year low. However, the Ministry of Finance in the past reasoned that the decline in household savings was due to a double-digit growth in personal loans. "The household sector is not in distress, clearly. They are buying vehicles and homes on mortgages," it clarified, dismissing concerns over the rising indebtedness of households.
Even as loan growth to the consumer segment slowed down, the quality of the portfolio has improved. Delinquency levels, except for credit cards, have decreased, upgrades from Special Mention Accounts (SMA)-2 accounts shot up, while slippages fell. The gross non-performing asset ratio of the banks' consumer segment loans stood at 1.4% in March, 2025. Moreover, in a sign of improving underwriting standards, the share of borrowers rated prime and above increased for both PSBs and PVBs.
Likewise, the NBFC sector too remains resilient, but remains vulnerable to stress in household balance sheets with attendant consequences for asset quality. Bad loans within the retail segment stood at 3.1% compared to 1.2% for banks in March 2025.
But on balance, the RBI's latest report observed that overall risks to the Indian financial system from lending to households remain contained with easing monetary policy cycle likely to reduce debt service pressures on borrowers going forward. However, the trend in household debt accumulation, especially among lower-rated borrowers, requires close monitoring, it added.
Meanwhile, an update of the analysis of financial wealth of Indian households shows that it sharply in FY24. Since Q3, FY20, asset price gains contributed to around one-third of the increase in the financial assets, while the remaining was on account of an increase in financial savings. Deposits and insurance and pension funds formed nearly 70% of household financial wealth as on March 2024 even as the share of equities and investment funds has increased.