India’s household debt levels, though rising gradually over the past three years, are not a cause for alarm, according to a detailed new report from the State Bank of India (SBI). The report asserts that India’s overall debt situation is manageable, well below the average of other emerging market economies (EMEs), and is supported by high-quality borrowers and constructive utilisation of funds.

India’s Household Debt Still Lower Than Global Peers

According to the SBI report, as of now, India’s household debt is estimated to be at 42 percent of GDP, which is significantly lower than the 49.1 percent average for other EMEs. Despite the growth, this lower ratio reflects a sound debt environment, indicating that Indian households are not overleveraged compared to global standards.

High Credit Quality Ensures Safety

The SBI report places a strong emphasis on credit quality. It reveals that two-thirds of the household debt portfolio in India comprises borrowers with prime and above credit ratings. This means the majority of loans are being taken by people with solid repayment capacity and credit histories, ensuring lower risk of default.

This is a critical factor when assessing debt sustainability. Unlike in many global markets where sub-prime borrowing has led to instability, India's situation is fundamentally stronger.

Borrower Growth, Not Excessive Borrowing

Another important insight shared in the report is that the rise in household debt is primarily due to an increase in the number of borrowers, not a significant rise in the average debt per borrower. This distinction is vital because it indicates broader credit access, rather than deeper indebtedness per individual.

This expansion of the borrower base is being driven by factors such as:

• Rising financial literacy

• Easy access to digital banking

• Formalisation of previously unbanked or underbanked households

Loans Used for Productive and Asset-Creating Purposes

The report categorises Indian household loans based on their end-use:

• 25 percent of loans are being used for asset creation, such as home loans and vehicle loans

• 3 percent are utilised for productive activities, such as loans for agriculture, education, or small businesses

• 45 percent of the total household loan portfolio includes consumption loans, including credit cards, personal loans, and consumer durables

This pattern shows that a substantial portion of Indian household debt is used for long-term value creation, which contributes to economic growth and individual wealth accumulation.

RBI Policy Helps Ease Interest Burden

The report also focuses on how monetary policy has been aiding households. The Reserve Bank of India (RBI) is currently in a rate-easing cycle, having already cut the policy repo rate by 100 basis points.

Most notably, a large portion of retail and MSME loans — around 80 percent — are now linked to the External Benchmark Lending Rate (EBLR). This means that whenever the repo rate falls, interest rates on these loans also decline automatically, giving borrowers instant relief.

According to SBI estimates, this rate-cut cycle could lead to savings of ₹50000 to ₹60000 for Indian households on interest payments over the coming two years.

Recent Policy Steps by the RBI

In a major move last week, the RBI reduced the policy repo rate by 50 basis points, bringing it down to 5.5 percent. This move came under the Liquidity Adjustment Facility (LAF), which aims to make borrowing cheaper for banks and ultimately, for consumers.

Additionally, the RBI also announced a 100 basis point reduction in the Cash Reserve Ratio (CRR) to be implemented in four phases of 25 basis points each, starting from September 6.

This step will inject more liquidity into the banking system, further supporting credit growth and reducing lending rates.

What Does It Mean for the Indian Consumer

The combination of lower interest rates, easier access to formal credit, and rising loan quality has created a favourable borrowing environment in India. Households can now:

• Borrow at lower interest rates

• Access formal credit faster and more efficiently

• Invest in long-term assets like homes and education

This also contributes to the overall financial inclusion goals of the government and supports growth in the rural and semi-urban economies, where formal credit penetration was previously low.

Why Rising Debt Is Not Alarming for Now

While rising household debt often triggers fears of future financial instability, the SBI report offers reassurance. It argues that as long as:

• Borrowers remain high quality

• Debt is used for asset-building or income-generating purposes

• Interest rates remain affordable

… then household debt is not only manageable, but actually beneficial for the economy.

India’s financial sector is also tightly regulated, with strong oversight from the RBI, credit monitoring agencies, and banking institutions — adding a further layer of safety.

Challenges That Need Monitoring

Despite the optimism, the report also hints at areas that require continued observation:

• Rise in unsecured personal loans could pose future risks if income levels do not keep pace

• Consumption-based borrowing, while useful for short-term needs, does not generate assets or income

• Economic shocks like job losses or inflation can still impact repayment ability

Hence, the RBI and banks must remain vigilant, and ensure responsible lending while also promoting credit discipline among borrowers.

Conclusion: A Balanced and Cautious Outlook

In summary, the SBI report provides a detailed and well-reasoned explanation of why India’s rising household debt is not yet a cause for worry. The low overall debt-to-GDP ratio, combined with strong borrower profiles, asset-linked borrowing, and a favourable interest rate environment, all point towards a healthy credit ecosystem.

With ongoing regulatory support, responsible borrowing, and continued financial education, India can leverage this rise in household credit to fuel inclusive economic growth.

Disclaimer

This article is for educational and informational purposes only and does not constitute financial advice. Investment decisions should be based on individual risk tolerance and consultation with SEBI-registered advisors. Market conditions are volatile and subject to change. Neither the author nor the platform is responsible for losses arising from use of this information.

The Upcoming IPOs in this week and coming weeks are Eppeltone Engineers, Aten Papers, Patil Automation, Oswal Pumps, Samay Projects Services, Monolithisch India.

The Current active IPO are Jainik Power Cables, Sacheerome Limited.

Start your Stock Market Journey and Apply in IPO by Opening Free Demat Account in Choice Broking FinX.

Join our Trading with CA Abhay Telegram Channel for regular Stock Market Trading and Investment Calls by CA Abhay Varn - SEBI Registered Research Analyst