RBI cautions on household debt and financial stability: Highlights from the financial stability report

The Reserve Bank of India (RBI) has issued a cautionary warning regarding the rising household debt in the country, stating that it warrants close monitoring from a financial stability perspective.

According to the central bank’s half-yearly financial stability report, overall household savings have declined to 18.4% of GDP in 2022-23, down from an average of 20% of GDP over the past decade. This, coupled with an increasing trend in financial liabilities, has raised concerns about the sustainability of household debt levels.

India’s gross savings rate stood at 29.7% of gross net disposable income (GNDI) in 2022-23, with households being the primary savers, accounting for 60.9% of aggregate savings. However, the share of net financial savings in total household savings has been declining, falling to 28.5% in 2022-23 from an average of 39.8% over the past decade.

The report highlights that the sharp rise in household financial savings during the pandemic has been drawn down subsequently, with households shifting towards investing in physical assets. Additionally, households are diversifying their financial savings, allocating more to non-banks and capital markets.

The RBI also notes that financial liabilities of households have risen in the post-pandemic period, with retail loan growth surging for both consumption and investment purposes. Agricultural and business loans have also seen an increase, with more than two-thirds of borrowers being of prime and above credit quality.

While the stock of household debt in India is relatively low compared to other emerging market economies, it is comparatively high in relation to GDP per capita, the RBI warns. Consumer credit, a major driver of banking business, remained robust during the second half of FY24, but the impact of increased risk weights on certain segments has pulled down the rate of growth in overall consumer credit.

The report also highlights concerns in the consumer credit segment, particularly regarding delinquency levels among borrowers with personal loans below ₹50,000. The RBI warns that close monitoring is required, as vintage delinquency remains relatively high in personal loans, and a significant number of borrowers have multiple loans at the time of origination.

Overall, the RBI’s cautionary warning underscores the importance of monitoring household debt levels and ensuring financial stability in the country.