In a revealing analysis from the Reserve Bank of India's (RBI) latest Financial Stability Report, India's household debt has climbed to 41.3% of GDP as of March 2025, surpassing the five-year average of 38%. This sustained increase highlights a growing reliance on borrowing among Indian households, even as the figure remains relatively low compared to peers in emerging markets. The report paints a nuanced picture of borrowing trends, savings recovery, and financial resilience, prompting questions about whether this debt signals consumer confidence or underlying stress.

A closer look at the composition of household loans reveals a shift toward consumption-driven borrowing. Nearly 46% of total loans are now allocated to personal loans, credit cards, and consumer durables, indicating that many Indians are financing everyday expenses and lifestyle needs through credit. In contrast, loans for asset creation, such as housing and vehicles, account for about 36%, while only 18% is directed toward productive purposes like education, agriculture, or small business ventures.

This trend underscores a behavioral change in consumer habits, facilitated by easier access to retail loans through banks, non-banking financial companies (NBFCs), and digital platforms. On the savings side, the report offers some optimism. Net household financial savings have rebounded to 7.6% of GDP in FY25, up from 5.2% in FY24, though still below pre-pandemic levels. Deposits continue to dominate savings at 40%, followed by equity investments at 23%.

A former Chairman of a public sector bank viewed the debt rise as a "paradigm shift" and behavioral change, attributing it partly to the convenience of retail lending. He emphasized that increasing debt is manageable as long as repayment capacity is monitored, highlighting improvements in borrower quality through credit bureaus and stronger credit histories. However, he cautioned against reckless lending by institutions, stressing the need to link loans to borrowers' ability to repay. "So long as the debt is going up is not as much of a challenge if it can be repaid in good time," he noted, advocating for cautious practices across banks, NBFCs, and digital lenders.

An economist at another leading bank offered a contrasting yet complementary perspective, drawing parallels to developed economies where consumerism, fueled by leverage, has driven growth. He argued that rising retail and personal loans for consumption are not inherently problematic but essential for GDP expansion, especially when consumption lags due to high inflation and stagnant incomes. 

"Consumption is one of the links to overall GDP growth," he said, pointing out that borrowing enables access to goods and services, benefiting the economy. Yet, he echoed the call for caution, referencing past RBI interventions like increased risk weights on unsecured loans to prevent overextension. He highlighted the positive economic impact of consumption loans, even for non-durables, but stressed the regulator's role in maintaining vigilance.

Another section acknowledged the vulnerability of low credit score and high risk borrowers—32% of consumption loans fall into this category—warning that economic downturns, job losses or rising interest rates could further complicate the financial stress. "They will definitely be vulnerable," one senior financial analyst said, underscoring that banking inherently involves risk-taking, but expertise in customer evaluation is crucial to avoid pitfalls seen in past cycles, such as infrastructure lending.

The conversation also touched on the banking sector's robust health, with NPAs at decade-low levels, and the potential shift in credit growth. Few bankers predicted that as corporate borrowing picks up—currently subdued due to market fundraising and ample cash reserves—retail lending might migrate more to NBFCs, with banks participating through co-lending or direct assignments.

They suggested banks could adjust portfolios from a 65% retail focus to a more balanced 50-50 split depending on opportunities. They also expressed concern over savings rates, deeming 7.6% insufficient to sustain banking liquidity amid diversions to equities. They called for higher savings to fund both consumption and investment, describing banks as the "fulcrum" of the economy while noting the unsustainability of RBI's open market operations for liquidity support.

Overall, the RBI report and expert dialogue suggest a balanced outlook: household debt's rise reflects evolving consumer behaviour and economic necessities, but it demands prudent lending and regulatory oversight to mitigate risks. As India navigates this landscape, the interplay between borrowing, savings, and growth will be key to maintaining financial stability. The discussion concluded on a forward-looking note, with both experts optimistic about the sector's resilience amid potential reforms and economic unfolding.