RBI Highlights Rising Household Debt as a Positive Trend for Financial Stability

The Reserve Bank of India (RBI) has reported a steady increase in household debt over the past three years, which reached 42.9% of GDP at current market prices as of June 2024. While this level remains relatively low compared to other emerging market economies (EMEs), the RBI has characterized the rise as a positive development for the country’s financial system.

According to the central bank, the increase in household debt is largely driven by a rise in the number of borrowers rather than a significant surge in average indebtedness per individual. As of March 2024, borrowing by individuals accounted for 91% of total household financial liabilities.

The report identified three primary reasons for household borrowing: consumption, asset creation, and productive activities. Consumption loans include personal loans, credit card debt, and loans for consumer durables. Asset creation loans primarily involve mortgages, vehicle loans, and two-wheeler loans. Loans for productive activities finance areas such as agriculture, business ventures, and education.

The report further revealed that nearly two-thirds of the total loan portfolio is held by borrowers with prime or higher credit quality. Borrowing patterns differ significantly across risk categories: subprime borrowers tend to take loans primarily for consumption, while super-prime borrowers focus on asset creation, particularly housing.

The RBI noted that per capita debt among super-prime borrowers has risen substantially, reflecting their increased reliance on credit for investment in assets. In contrast, per capita debt levels, among other risk categories, have remained stable.

From a financial stability perspective, the RBI views the current trend as encouraging. The report highlighted that the growing debt levels among highly rated borrowers, particularly when used for asset creation, enhance overall credit quality and strengthen financial resilience.

The RBI emphasized the evolving borrowing patterns in India, attributing them to rising financial inclusion and diverse credit needs. This shift toward responsible borrowing and asset-building, particularly among borrowers with higher credit ratings, is expected to reinforce the stability of the financial system in the long term.

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