India's household savings rate has been declining steadily, raising concerns about the country’s economic stability, especially as foreign direct investment (FDI) inflows remain low. According to a report by Blume Research, the biggest reason for this trend is the sharp increase in financial liabilities, primarily due to unsecured personal loans.

India’s household savings decline: A worrying trend

Household savings have historically been a key pillar of India's economic strength. However, the data paints a concerning picture:

• In FY00 (Year 2000), household savings accounted for 84% of total savings, but by FY23, this had dropped to just 61%.
• Household financial savings as a percentage of GDP have also declined from 10.1% in FY00 to just 5% in FY23.
• At the same time, household financial liabilities have surged from 2% of GDP in FY00 to 5.8% in FY23, primarily driven by rising consumer debt.

This means that Indian households are saving less and borrowing more, a shift that could impact long-term financial stability.

Rising debt: The role of unsecured loans

One of the primary reasons behind India’s increasing household debt is the rapid growth of unsecured personal loans. According to the report:

• The share of consumer loans in total credit has increased from 21% in FY16 to 34% in FY24.
• Meanwhile, the share of industry loans has dropped from 42% to 34% in the same period, reflecting a shift in lending patterns.

A major contributor to this trend is the rise of Small Ticket Personal Loans (STPLs), which are easy to obtain but come with high financial risks. Unlike traditional bank loans, these are often provided by non-banking financial companies (NBFCs) and fintech firms, which offer quick digital loan approvals with minimal paperwork.

This ease of access has led to a surge in household debt, as borrowers take multiple loans, often without assessing their long-term repayment capacity.

Impact of declining savings and rising debt on the economy

The combination of lower household savings and increasing financial liabilities could have far-reaching consequences for India's economy. Key concerns include:

1. Reduced financial security for households – With more income going toward loan repayments, families have less disposable income for investments, emergencies, or long-term financial planning.

2. Higher economic vulnerability – A lower savings rate weakens the economy’s ability to absorb shocks, such as global financial crises, inflation, or sudden job losses.

3. Increased risk of financial instability – A sharp rise in unsecured lending could lead to higher default rates, especially if economic growth slows down or interest rates rise.

Government and RBI’s response to the issue

The Reserve Bank of India (RBI) has already taken measures to monitor the rapid growth of unsecured loans. Recently, the central bank raised risk weights on unsecured lending by NBFCs to reduce excessive borrowing. However, there is a need for stricter regulations on digital lending and greater financial literacy initiatives to help individuals make informed borrowing decisions.

Conclusion

India’s declining household savings and rising financial liabilities highlight growing economic risks. While unsecured loans have fueled short-term consumption, they also pose long-term financial challenges. Ensuring financial stability will require a balanced approach – encouraging responsible borrowing, improving financial literacy, and promoting long-term savings. As FDI inflows remain weak, India’s economic resilience will depend on reversing this savings decline and ensuring sustainable credit growth.

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