 "Representational image. ANI")
What happened
India’s household debt has been on the rise over the past three years. However, according to a report by the State Bank of India (SBI), this increase is not a cause for concern.
The Reserve Bank of India (RBI) sees the increase in household debt as sustainable, especially given two-thirds of the portfolio is made up of prime and above-credit-quality borrowers.
Tell me more
- SBI reports that two-thirds of household debt in India is of prime and above credit quality, indicating strong repayment capacity.
- The increase in debt is attributed to a higher number of borrowers, not excessive borrowing by existing borrowers.
- Around 25% of household loans are for asset creation (homes, vehicles).
- Another 30% are for productive purposes such as agriculture, business, and education.
- 45% of loans (personal, credit card, and consumer durable) are used for consumption.
- India’s household debt stands at 42% of GDP, lower than the 49.1% average among other emerging market economies (EMEs).
- The RBI’s rate-easing cycle has led to a 100-basis-point cut in the repo rate, reducing interest rates on loans linked to external benchmarks.
- Approximately 80% of retail and MSME loan portfolios are now linked to the External Benchmark Lending Rate (EBLR), leading to potential savings of Rs 50,000–60,000 for households.
Impact Shorts
More Shorts- The rate cut cycle is expected to continue for two years, helping further reduce household borrowing costs.
- Last week, the RBI reduced the repo rate by 50 basis points to 5.5% and also cut the Cash Reserve Ratio (CRR) by 100 basis points in four tranches.
The context
Household debt is a key indicator of financial stability, and while rising debt can be risky, the structure and quality of India’s household borrowing paint a relatively healthy picture.