The economic effects of rising household debt | Number Theory

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Last week, the National Statistical Office (NSO) released the National Account Statistics (NAS) tables for 2025 which has data up to 2023-24. An HT analysis of this data pointed out the trend of rise in household indebtedness but underlined the fact that one must wait for granular data on household debt from sources such as the All-India Debt and Investment Survey (AIDIS) to infer what this exactly means for rich and poor households. The class dynamics within households aside, what

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The economic effects of rising household debt

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  A bigger share of private consumption seems to be debt financed now

  A simple comparison of total outstanding personal loans and private final consumption expenditure (PFCE) shows that the former’s share in the latter has doubled between 2011-12 and 2024-25. Given the fact that share of PFCE has not changed drastically in the overall GDP – it is more than 50% but less than 60% -- the share of total outstanding personal loans has also increased by almost the same factor during this period. The key takeaway from this data point is simple: personal debt has played a major role in the Indian growth story in the last few years.
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  And personal loans’ weight in the total bank credit has also increased significantly

  The share of personal loans in total outstanding non-food credit of scheduled commercial banks was 23.7% in 2007-08 (the earliest period for which this data is available) and fell to as low as 18% in the early 2010s. This number has been increasing consistently since the mid-2010s and reached an all-time high of 32.7% in 2024-25. The share of loans given to non-banking financial companies (NBFCs) in the pool of total outstanding non-food credit – NBFCs often borrow money from banks to lend to retail consumers –increased from less than 4% in the in the 2000s to an all-time high of 9.8% in 2022-23. It has fallen marginally to reach 9% in 2024-25. If one were to add the share of personal loans and loans to NBFCs, their share in total outstanding non-food credit has increased from less than one-fourth in 2011-12 to more than 40% in the last few years.
• Are household savings moving away from bank deposits?

  Intuitively, one would expect this to be true, as instruments such as mutual funds are becoming more and more popular for investments by households. NAS data composition of household gross financial savings shows that bank deposits had a share of 52.8% in total gross financial savings of households in 2011-12. This number stayed above 50% until 2013-14, and fell sharply in the subsequent period barring 2016-17, the year of demonetisation, when all of the cash in the economy had to be deposited in banks. However, the last two years have seen a rise in this share once again. The share of shares and debentures (including mutual funds) in total gross financial savings of households has not crossed the 11% mark even once and was just 8% in 2023-24.
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  Potential risks notwithstanding, personal loans do not seem to be a risk as of now

  The rising share of personal loans in both PFCE and total outstanding bank credit, when read with the rising indebtedness of households as seen in the NAS data could well be a systemic risk for the macro economy. If households fail to service these loans, it could pose a big bad loan crisis for the banks and if they decide to not borrow anymore, it could generate growth headwinds for the economy. So far, the Indian economy seems to have avoided both these possibilities. Not only are households borrowing more – as can be seen in NAS and bank loan data – they have also been paying back their loans promptly, which is seen in personal loans having the lowest gross non-performing asset ratio among major sectors in the latest Financial Stability Report released by the RBI in December 2024. To be sure, while things are not bad at the moment, a bigger weight of personal loans in the economy and bank credit means that both the overall economy and banking sector will be more vulnerable to a large shock on household incomes in the future. This underlines the need for greater vigilance, even though there is no need to panic as of now, in monitoring household debt.