Household debt has seen a sharp rise after the outbreak of the Covid-19 pandemic. It has increased from 36.6% of GDP in June 2021 to 40.2% by December 2023 and further to 42.9% as of June 2024. 

This debt surge has been more widespread in all segments of the population, evident from the flow of credit to households across the entire income distribution.

For the period between 26 March 2021 and 22 March 2024, personal loans by the banking sector grew 75%, retail credit by non-banking financial companies and housing finance companies rose by 70% and loans from microfinance institutions increased by 67%. Household disposable income, in comparison, grew 43% during this period and consumption by 49%.

Household incomes have thus not grown enough to sustain consumption and savings at such levels but for this surge in household borrowings over these years.

These loans, taken for consumption and not investment purposes, are largely unsecured. Between 26 March 2021 and 22 March 2024, the unsecured personal loan book of banks (personal loans, credit cards and consumer durables) rose by 82%, while that of NBFCs grew by roughly 130%. 

Such loans tend to dominate the borrowings of the less well-off, generally those with less than Rs 5 lakh per annum in income, according to the Reserve Bank of India. This only indicates that, post the pandemic, the less well-off went on a credit binge to support their consumption, while the more affluent, who also borrowed heavily, did so to accumulate assets like houses and cars, the Indian Express reported.

More households are taking on debt; they are also taking on more debt than before. As per the RBI, 11% of borrowers with a personal loan of less than Rs 50,000 had an overdue personal loan. In the second quarter of 2024-25, nearly three-fifths of customers who have availed of a personal loan had more than three live loans. In the case of microfinance, the share of borrowers availing loans from four or more lenders was at almost 6% in September 2024.

Greater indebtedness implies that loan repayment will account for a bigger portion of household disposable income, the Indian Express further reported. And unless incomes grow rapidly, the burden of repayment will eat into disposable incomes, impacting spending capacity.

The households have a debt problem at hand as they are over-leveraged and their income growth has remained sluggish.