Over the last few years, India has quietly slid into a household debt crisis — one that now threatens to choke the very engine that powered the post-pandemic recovery: private consumption. While attention in the past was focused on corporate deleveraging and bad loans in the banking system, today the biggest concern may lie in the finances of the average Indian household.

Addressing the issue, Congress leader Jairam Ramesh asked, “This growing indebtedness is unsustainable and is on the verge of creating severe financial distress for our households. Is the Prime Minister awake?”

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Since the pandemic, household debt has ballooned at an alarming pace. From just 36.6 per cent of GDP in June 2021, household debt has risen to 42.9 per cent by mid-2024 — significantly higher than the pre-Covid (2015-19) average of around 33 per cent. What’s more worrying is that this debt surge isn’t limited to the rich. Credit growth has spread across the income spectrum, with lower-income groups increasingly relying on unsecured personal loans and microfinance.

Between March 2021 and March 2024:

• Personal loans by banks grew by 75 per cent.
• Retail credit by non-banking finance companies (NBFCs) and housing finance companies (HFCs) surged 70 per cent.
• Microfinance loans rose 67 per cent.

This rapid increase in credit availability helped households maintain consumption levels even as incomes lagged behind — disposable income grew only 43 per cent in the same period, and consumption by 49 per cent. But with borrowing now exceeding what income growth can sustain, the cracks are starting to show.

A critical issue isn’t just how much Indians are borrowing — but what they’re borrowing for. A growing share of loans has been used to fund consumption, rather than investment or asset-building. Between 2021 and 2024:

• Unsecured personal loans from banks (credit cards, consumer durables) grew by 82 per cent.
• The same category from NBFCs spiked by 130 per cent.

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These types of loans are typically riskier and tend to dominate the borrowing profiles of lower-income groups, especially those earning under Rs 5 lakh annually. As per the RBI, 11 per cent of borrowers with loans under Rs 50,000 already had overdue payments.

The stress in household finances is increasingly visible:

• Nearly 60 per cent of borrowers have more than three active personal loans.
• In the microfinance space, 6 per cent of borrowers have loans from four or more lenders.
• Delinquencies (loans overdue by more than 90 days) are rising across NBFC portfolios.
• Banks have ramped up write-offs of unsecured loans, signalling deteriorating asset quality.
• Stress is also growing in gold loans, vehicle loans, and consumer finance.

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Even the RBI has sounded alarm bells. In late 2023, it raised risk weights on unsecured consumer credit to slow down lending. But as growth momentum began fading, the central bank has since partially rolled back those curbs — a move that some fear could worsen long-term risks.

Stagnant job creation, low real income growth, and lack of stable earning opportunities have pushed households to borrow just to maintain living standards. This is particularly evident among the lower- and middle-income classes.

Today, personal loans form roughly a third of all credit extended by banks, surpassing credit to services, industry, or agriculture. For NBFCs and HFCs, retail loans make up over half of total lending.