More Loans, Less Savings: What's Happening With Indian Household Finances

Indians are staring at a financial doom, which if not controlled could put finances of many households under distress. A recent report by Morgan Stanley, a multinational investment bank and financial services company, shows that household debt in India has edged up slightly, reaching 23.9 per cent of GDP in financial year 2025 (FY25), an increase from 23.1 per cent the previous year.

The leading segment behind this surge is the uptake of retail loans, which includes personal borrowings for everything from homes to consumer goods. And while the numbers may seem small at first glance, the trend underneath is beginning to cause unease.

Dip in Savings: A Concern Bigger Than Debts

The report finds that a major point of concern is that even as household debt has climbed, households' net financial savings have slipped. Before the pandemic, India's total household savings, a combination of financial and physical assets, stood at around 19 per cent of GDP.

By FY24, this figure had declined to 18.1 per cent. Not a collapse, certainly, but enough of a decline to raise concerns about whether Indian households are becoming over-leveraged.

The analysts believe the debt situation remains manageable for now. In their view, the key factor to watch is income growth. If incomes keep growing with nominal GDP, as they anticipate, then households should be able to handle debt burdens without significant distress.

The report also mentions that the Reserve Bank of India's (RBI) approach to calculating household debt counts loans to small enterprises and other firms, which pumps the figure to approximately 42.1 per cent of GDP. Morgan Stanley, however, for its analysis uses a narrower definition and considers only loans that individuals and families borrow directly.

What is driving this surge in borrowing?

It's not that people are borrowing for discretionary needs. A significant portion of this rise in liabilities is mortgage-led, meaning people are investing in homes, a form of physical saving. This has partially cushioned the fall in net financial savings.

Concerns about asset quality, this is how risky these loans might be, have also been addressed. Stress in the personal loan segment has increased only marginally. Additionally, the report notes that when RBI recently tightened lending rules, it only slowed down loan growth but did not trigger a wave of defaults.

The distress is visible in unsecured lending by microfinance institutions, such as Non-banking financial institutions (NBFCs). However, the report notes that these loans form a small part of the overall picture and don't pose a systemic risk.

What are the concerning signs?

In the second half of 2024, economic growth slowed down and many wondered if weakened household balance sheets are starting to crimp spendings by Indian households. If families are stretched too thin, it directly impacts the consumption which is the backbone of India's economy.

However, though financial savings have seen a dip, overall household savings (including physical assets like property) has remained fairly steady. Household financial assets have held at around 11.4 per cent of GDP, and while liabilities have risen to 6.2 per cent of GDP, the net result has not caused imbalances in broader indicators like the current account deficit, which has averaged a modest 1.3 per cent of GDP over the last three years.

The report concluded that the rise in household debt is part of a bigger, structural change which translates to more financialisation, deeper digital access to credit, and a shift in how households think about money.

Compared to other countries, India's household debt is still at a low base. As long as income growth keeps pace, analysts believe the economy can handle a gradual rise in leverage without tipping into trouble.