While household debt in India has been increasing over the past three years, a State Bank of India (SBI) report suggested that it’s not necessarily a cause for alarm, especially when considering the context of the economy and the type of debt.
It said India’s household debt is manageable and not worrisome at all, as two-thirds of the portfolio is of prime and above credit quality and the rise is attributed to a growing number of borrowers rather than an increase in average indebtedness.
Additionally, asset creation, such as home and vehicle loans, makes up 25%, while productive purposes like agriculture, business, and education loans constitute 30%. The Reserve Bank of India (RBI) views the rise in household debt as manageable, particularly since two-thirds of the portfolio consists of prime and above-credit-quality borrowers.
As of now, India’s household debt is at a relatively low level, 42%, compared to 49.1% for other emerging market economies (EMEs). SBI’s analysis revealed that 45% of loans, including personal loans, credit cards, and consumer durable loans, are used for consumption purposes.
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The RBI’s ongoing rate-easing cycle has already seen a 100-basis-point reduction in the repo rate, leading to an automatic decrease in externally linked benchmarked interest rates. This is expected to provide substantial relief to households.
During this rate-cut easing cycle, it is estimated that approximately 80% of retail and MSME loan portfolios are linked to the External Benchmark Lending Rate (EBLR), suggesting potential savings of around Rs 50,000 to Rs 60,000 for households.
This easing cycle is projected to continue for about two years, further contributing to a decline in household interest costs.
Last week, the RBI announced a reduction in the policy repo rate under the Liquidity Adjustment Facility by 50 basis points to 5.5%. This rate cut was accompanied by a cut in the Cash Reserve Ratio (CRR) by 100 basis points in four tranches of 25 basis points each starting September 6.
