India’s rising household debts are not worrisome: SBI report

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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 3%. 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.

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 ₹50,000 to ₹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.