India’s household borrowing at 41.3% of GDP manageable, but reckless lending a risk, say experts

India’s household borrowing, which has climbed to 41.3% of GDP, remains manageable for now, but experts have cautioned that reckless lending could turn this credit expansion into a source of stress for the financial system.

Speaking to CNBC-TV18, former State Bank of India Chairman Dinesh Khara and Bank of Baroda Chief Economist Madan Sabnavis said the rise in household debt reflects a mix of credit deepening and changing consumer behaviour, even as banks and regulators need to stay alert to risks, especially in unsecured and consumption-led lending.

According to the Reserve Bank of India’s Financial Stability Report, household debt stood at 41.3% of GDP as of end-March 2025, up from a five-year average of around 38%. While the number is higher than in the past, India is still relatively better placed compared with several emerging market peers.

Khara said the rise in borrowing marks a clear shift in how retail credit is accessed and used. “When we compare it with the previous five years, yes, of course, it’s a paradigm shift,” he said, adding that easier access to retail loans has changed borrower behaviour. In his view, rising debt levels are not necessarily a problem as long as repayment remains timely. “So long as the debt is going up, it is not as much of a challenge if it can be repaid in good time,” Khara said.

He also pointed to an improvement in borrower quality, noting that consumers are increasingly conscious of maintaining a strong credit history. However, Khara warned that this trend can only remain healthy if lenders avoid excesses. “There should not be reckless lending by any institution—be it NBFCs, banks, or digital lenders,” he said, stressing that lending must be linked to the borrower’s ability to repay.

A closer look at the data shows that nearly 46% of household loans are now consumption loans, such as personal loans, credit cards and consumer durable financing. Loans for asset creation, including housing and vehicles, account for about 36%, while only 18% goes towards productive purposes like education, agriculture or small businesses. This shift has raised questions about whether borrowing is being driven more by income confidence or income stress.

Sabnavis said rising consumption credit should not automatically be seen as a red flag. Drawing parallels with developed economies, he argued that consumerism, supported by leverage, has played a key role in economic growth. “I don’t think it’s anything odd to see retail loans increasing, personal loans going up even for consumption purposes,” he said. “Consumption is one of the links to overall GDP growth.”

With high inflation and slower income growth weighing on spending, Sabnavis said borrowing provides households with access to consumption, which can support economic momentum. At the same time, he cautioned banks against repeating past mistakes of overextending credit in fast-growing segments. “There is always a tendency that when a particular segment starts growing, there can be overextension,” he said, underlining the importance of RBI’s prudential measures, such as higher risk weights on unsecured personal loans.

Concerns remain around asset quality, particularly in unsecured lending. RBI data shows that unsecured loans still account for 53% of total retail slippages, even after regulatory tightening, with a large share coming from private sector banks. Khara said aggregate numbers do not always tell the full story and that stress needs to be examined at an institutional level. Underwriting models, he said, may need closer scrutiny where slippages are high, to ensure borrower repayment capacity is properly assessed.

Sabnavis flagged risks to household balance sheets, especially as around a third of consumption borrowers fall below the prime category. “They will definitely be vulnerable,” he said, particularly if job conditions weaken or interest rates rise. While banks often have better visibility on existing customers, he said greater caution is needed when lending to new-to-bank borrowers.

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Despite these risks, the broader financial stability picture remains reassuring. Net household financial savings have recovered to 7.6% of GDP in FY25 from 5.2% in FY24, although they are still below pre-pandemic levels. RBI stress tests also suggest that asset quality could improve from 2.2% to 1.9% by March 2027 under the baseline scenario, with capital levels remaining strong across banks, NBFCs, mutual funds and insurers.

The message from experts is clear: India’s rising household debt is not alarming in itself and can support growth, but the quality of lending will determine whether it remains sustainable. As Sabnavis put it, “Banks have to be cautious and regulators have to be alert at all times.”

Watch accompanying video for entire discussion.