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Rising Consumer Credit in India: A Macroeconomic Concern?

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The Financial Stability Report (FSR) 2024 by the Reserve Bank of India (RBI) highlights a growing trend of consumer credit expansion in India. While credit accessibility fuels consumption and economic activity, the rising household debt ratio raises concerns about financial sustainability. The increasing dependence on borrowed funds for consumption, rather than investment, could have long-term macroeconomic consequences, particularly for lower-income groups.

Table of Contents

  1. Introduction

  2. Key Findings of RBI’s FSR 2024

  3. Concerns & Risks of Rising Consumer Credi

  4. Way Forward: Ensuring Sustainable Borrowing

  5. Conclusion

 

1. Introduction

Consumer credit plays a crucial role in modern economies by increasing spending capacity and boosting demand. However, when credit grows at an unsustainable pace, it can lead to financial instability. The FSR 2024 sheds light on India's increasing household debt, shifting borrowing patterns, and the risks associated with rising consumer credit. The concern is not just about the quantum of borrowing but also about how much of it is used for consumption rather than investment, which could impact economic stability in the long run.

 

2. Key Findings of RBI’s FSR 2024

 

Increase in Household Debt

  • Household debt has risen from 36.9% of GDP in June 2022 to 40.1% in March 2024.

  • The increase is driven by higher borrowing rather than a proportional rise in indebtedness.

 

Shift in Borrowing Patterns

  • Super-prime borrowers (individuals with high credit scores) dominate large-value loans.

  • The share of sub-prime borrowers (low credit score segment) is declining, indicating more selective access to credit.

 

Growth in Unsecured Loans

  • Credit cards, personal loans, and consumer loans are rising significantly.

  • There is a shift towards borrowing for short-term consumption rather than long-term asset creation.

 

Decline in Household Assets

  • The share of household assets as a percentage of GDP has fallen from 110.4% in June 2022 to 108.3% in March 2024.

  • This suggests that households are accumulating debt faster than they are building assets, leading to potential financial risks.

 

3. Concerns & Risks of Rising Consumer Credit

 

1. Rising Consumer Loans for Consumption

  • A significant portion of borrowing is being used for non-productive consumption, such as luxury spending, travel, and discretionary expenses.

  • Unlike housing or business loans, which contribute to asset creation, these loans do not generate future income, leading to higher financial stress.

 

2. Financial Vulnerability of Lower-Income Borrowers

  • Households with lower savings struggle with loan repayments, increasing the risk of defaults and bad loans.

  • Rising EMIs and inflationary pressures further squeeze disposable income, limiting future consumption and savings.

 

3. Potential Economic Slowdown Due to Over-Leveraging

  • Over-reliance on credit-fueled consumption can create a debt-driven bubble, where growth is dependent on continuous borrowing.

  • In case of economic downturns, interest rate hikes, or job losses, highly leveraged consumers may cut down spending, slowing overall demand.

 

4. Macroeconomic Implications of Excessive Borrowing

  • High debt levels without proportional income growth reduce demand multipliers, impacting economic expansion.

  • Excessive borrowing increases exposure to interest rate fluctuations, making the economy more vulnerable to financial shocks.

  • A credit-fueled growth model can lead to higher inflation, worsening financial inequality.

 

4. Way Forward: Ensuring Sustainable Borrowing

To maintain economic stability while benefiting from consumer credit, India must focus on financial discipline and regulatory oversight:

 

1. Strengthening Credit Assessment Mechanisms

  • Banks and NBFCs should adopt stricter risk assessment frameworks to prevent over-lending to financially vulnerable consumers.

  • Implementation of affordability-based lending norms to ensure that loans are granted based on repayment capacity, not just credit scores.

 

2. Encouraging Asset-Linked Borrowing

  • Policies should promote credit for productive purposes, such as housing, education, and entrepreneurship, over discretionary spending.

  • Expanding financial literacy programs to educate consumers about responsible borrowing and long-term financial planning.

 

3. Regulatory Oversight on Unsecured Credit Growth

  • The RBI may consider tighter regulations on unsecured loans, ensuring that high-risk lending is monitored and controlled.

  • Implementing caps on high-interest consumer credit, especially in vulnerable borrower segments, can prevent excessive debt accumulation.

 

4. Promoting Household Savings and Investments

  • Government policies should incentivize higher household savings and encourage investments in long-term assets.

  • Expanding access to alternative credit sources, such as microfinance and cooperative banking, to reduce reliance on high-cost consumer loans.

 

5. Conclusion

Rising consumer credit can be a double-edged sword—it boosts short-term economic activity but poses risks to long-term financial stability. While credit expansion reflects growing consumer confidence, excessive dependence on loans for consumption rather than investment can create systemic risks.

A balanced approach—ensuring responsible lending, promoting financial awareness, and enhancing regulatory oversight—is essential to safeguard economic resilience and prevent financial distress among borrowers. Policymakers must proactively address these challenges to ensure sustainable economic growth without over-reliance on credit-fueled consumption.