India’s economic trajectory, marked by robust growth and expanding domestic demand, is increasingly underpinned by a significant transformation in household financial behaviour, notably a surge in personal and retail consumption loans. In the first half of fiscal year 2026, non-housing retail loans, predominantly for consumption, accounted for a substantial 55.3% of total household borrowings, a marked shift that has seen them eclipse traditional categories like housing loans (28.6%) and loans for agriculture and business (16.1%), according to data from the Reserve Bank of India (RBI). This ascendance of consumer credit has been a consistent trend since March 2019, reflecting evolving consumer aspirations and a deepening financial market.
This growing reliance on retail credit coincides with an expansion in the overall indebtedness of Indian households, which has climbed to 41.3% of the gross domestic product (GDP) in the last financial year. This figure represents a sustained increase compared to its five-year average of 38.3%, prompting careful scrutiny from financial regulators and economic analysts alike. While the headline number might raise concerns about financial stability, the RBI’s Financial Stability Report for December 2025 offers a nuanced perspective, suggesting that the underlying credit quality remains sound, primarily driven by a higher proportion of ‘prime’ borrowers accessing these facilities. This implies that the growth in household debt is, to a significant extent, being undertaken by individuals with stronger repayment capacities and healthier financial profiles.
The phenomenon of rising household debt in India is a multifaceted one, indicative of a rapidly developing economy. On one hand, it signals increased financial inclusion and access to credit for a broader segment of the population, facilitating consumption that fuels economic growth. India’s real GDP expanded by a robust 8.2% in Q2 FY26, up from 7.8% in the previous quarter and 7.4% in Q4 of FY25, a growth largely propelled by resilient domestic demand. Personal loans, specifically those taken for immediate consumption, comprised a dominant 22.3% of the overall consumption-oriented credit, showcasing a clear preference for immediate gratification over long-term asset creation in a significant portion of the borrowing landscape. This trend reflects a confluence of factors, including rising disposable incomes, aggressive marketing by financial institutions, the convenience of digital lending platforms, and an aspirational middle class keen on upgrading their lifestyles.
However, the rapid accumulation of unsecured consumer debt also presents potential vulnerabilities. Unlike housing loans, which are typically collateralized and lead to asset creation, personal consumption loans often lack underlying security, making them inherently riskier for lenders if economic conditions deteriorate or borrower incomes falter. The RBI, while acknowledging the overall resilience, remains vigilant. Its report highlights that the improved risk profile of borrowers, with an increasing share of ‘prime and above’ rated individuals in outstanding loans, is a critical mitigating factor. As of September 2025, these better-rated borrowers accounted for a commanding 56.2% of total household loans by volume and an even higher 70.4% by value, indicating that the bulk of the lending is directed towards credible borrowers. Conversely, ‘subprime’ borrowers represented 23% of the loan volume but a much smaller 10.2% in terms of loan value, suggesting that while a significant number of higher-risk individuals are accessing credit, the quantum of exposure to them is relatively contained. This structure provides a layer of insulation against widespread defaults, bolstering the banking sector’s asset quality.
In a global context, India’s household indebtedness level, while rising, remains moderate compared to several peer emerging market economies (EMEs). For instance, countries like Chile, China, Malaysia, and Thailand exhibit household debt-to-GDP ratios ranging from 45.1% to a staggering 88%, significantly higher than India’s 41.3%. This suggests that India still possesses considerable headroom for credit expansion without immediately triggering alarm bells seen in more indebted nations. However, it is noteworthy that India’s level has surpassed that of economies like South Africa and Brazil, where the ratios stood between 33.8% and 36.6% of GDP. This comparative analysis underscores the dynamic nature of India’s credit market, positioning it somewhere in the middle tier of EMEs in terms of household leverage. The implications are complex: while it signals a maturing credit market, it also necessitates careful monitoring to prevent a potential build-up of systemic risk, especially as the economy continues its robust growth trajectory.
Monetary policy decisions also play a crucial role in shaping these borrowing patterns. The expectation of interest rate adjustments, such as Citi’s prediction of a total 100 basis points cut by the RBI in the current year, with an initial 25 basis point reduction in the repo rate by the Monetary Policy Committee in February, can significantly influence consumer behaviour. Lower interest rates typically reduce the cost of borrowing, making loans more attractive for both consumption and investment. This can further accelerate the growth of retail credit, potentially providing an additional impetus to domestic demand. However, it also places a greater responsibility on financial institutions to maintain stringent underwriting standards and on regulators to ensure prudent lending practices, especially in the unsecured loan segment.
Parallel to the rising debt, India’s household financial savings have also shown signs of improvement, climbing to 7.6% of GDP in Q4 FY25. This uptick was attributed to an increase in financial assets coupled with a stabilization of liabilities, while the aggregate stock of gross financial assets consistently remained above 100% of GDP. This simultaneous growth in both debt and savings paints a picture of a financially active populace. However, the growth in the financial wealth of households experienced some moderation, reflecting corrections in equity markets and investment funds. This highlights the sensitivity of household balance sheets to capital market volatility.
An examination of asset allocation reveals that traditional instruments continue to dominate. Deposits, along with insurance and pension funds, collectively accounted for a substantial 69.2% of household financial wealth as of the end of March 2025. While the share of equities and investment funds saw a marginal increase, indicating a nascent but growing interest in capital market participation, overall penetration remains low. A Securities and Exchange Board of India (SEBI) survey quoted in the report indicated that despite increasing awareness about securities market products, household penetration stood at a mere 9.5% of the country’s 337.2 million households, primarily concentrated in urban centers. This statistic underscores a critical challenge for India’s financial ecosystem: the need for greater diversification of household savings beyond conventional bank deposits and into more productive asset classes.
The RBI and SEBI have consistently advocated for the "financialization of savings," which entails shifting household wealth from physical assets (like gold and real estate) and traditional bank deposits into financial instruments such as mutual funds, equities, and bonds. This diversification is crucial not only for enhancing household wealth creation but also for channelling long-term capital into productive sectors of the economy, thereby aiding capital formation and sustainable economic growth. The dominance of equity within the securities market, as noted by the RBI, while positive, also suggests a need to broaden the investment horizon of households to other financial products to mitigate concentration risks and foster a more mature capital market.
In conclusion, India’s evolving household debt landscape, characterized by a burgeoning appetite for retail consumption loans, is a dynamic reflection of its economic progress and the expanding financialisation of its economy. While the increasing indebtedness warrants careful monitoring, particularly concerning the sustainability of unsecured credit growth, the RBI’s assessment of sound credit quality, driven by prime borrowers, offers reassurance regarding immediate systemic risks. The challenge ahead lies in balancing the impetus for consumption-driven growth with prudent financial management, fostering deeper financial literacy, and promoting a more diversified approach to household savings and investments. Regulatory vigilance, coupled with continued efforts to deepen financial markets and encourage responsible borrowing and saving habits, will be paramount in ensuring that this era of robust credit expansion contributes positively to India’s long-term economic stability and prosperity.
