Household debt warrants close monitoring: RBI

The Reserve Bank of India (RBI) has cautioned that household debt warrants close monitoring from a financial stability perspective.

With overall household savings declining to 18.4% of GDP in 2022-23 from an average of 20% of GDP over 2013-2022, and coupled with an increasing trend in financial liabilities, household debt warrants close monitoring, the central bank says in its half-yearly financial stability report.

India’s gross savings rate stood at 29.7% of gross net disposable income (GNDI) in 2022-23, with households being the primary savers and forming 60.9% of aggregate savings (10-year average for 2013-2022 stood at 63.7%).

For the household sector, savings in physical assets has been the dominant and rising component. The share of net financial savings in total household savings has been declining: it stood at 28.5% in 2022-23, from an average of 39.8% during 2013-2022. Combined with the rise in financial liabilities, net financial savings also declined to 5.3% of GDP during 2022-23 from an average of 8% during 2013-2022.

The sharp rise in household financial savings during the pandemic (51.7% of total household savings in 2020-21) has been drawn down subsequently, as in many other economies, and shifted towards physical assets, the banking regulator says. Alongside, households are also diversifying their financial savings, allocating more to non-banks and capital markets, it says..

Financial liabilities of households have risen in the post-pandemic period, as reflected in the surge in retail loan growth for financing both consumption and investment, cautions the RBI.

Agricultural and business loans have also grown. Notably, more than two-thirds of borrowers are of prime and above credit quality, it says.

At 40.1% of GDP, the stock of household debt in India is relatively low when compared to other emerging market economies, but in relation to GDP per capita, it is comparatively high, the RBI says.

Consumer credit – a major driver of banking business over the last decade – remained robust during the second half of FY24. Credit inquiry volumes differed across product categories: while inquiries for housing loans and loans against property categories rose, volumes in auto loans, credit card and personal loan categories moderated, the report shows.

Even as inquiry volumes remain robust, the impact of increase in risk weights on certain segments of consumer credit pulled down the rate of growth in overall consumer credit, especially personal loans and credit cards.

In the consumer credit segment, there are a few concerns that require close monitoring, according to the RBI. “First, delinquency levels among borrowers with personal loans below ₹50,000 remain high. In particular, NBFC-Fintech lenders, which have the highest share in sanctioned and outstanding amounts, also have the second highest delinquency levels, only below that of small finance banks. Second, Vintage delinquency, which is a measure of slippage, remains relatively high in personal loans at 8.2%. Third, little more than a half of the borrowers in this segment have three live loans at the time of origination and more than one-third of the borrowers have availed more than three loans in the last six months,” warns the banking regulator.