India's growing appetite for debt, fueled by the ease of Equated Monthly Installments (EMIs), presents a complex economic landscape. While borrowing can be a useful tool, the rising levels of household debt and changing patterns of credit usage raise concerns about financial stability and individual well-being. So, how much debt is too much, and is India nearing that point?

Several factors contribute to the increasing reliance on debt. Firstly, there's the easy availability of credit. Banks and Non-Banking Financial Companies (NBFCs) are actively promoting loans, particularly unsecured personal loans, making it easier than ever for consumers to access funds. Fintech companies are also playing a significant role, with embedded finance, co-lending frameworks and UPI-based digital disbursements further expanding access to credit. Secondly, there's a shift in borrowing trends. A growing proportion of loans are being used for consumption rather than asset creation, especially among lower-income groups. This is reflected in the increasing share of unsecured loans, such as personal loans and credit card debt, in household borrowing.

Data indicates a concerning trend. Household debt in India has been rising steadily, increasing from 36.6% of GDP in June 2021 to 42.9% in June 2024. While this is still lower than some other emerging market economies, the pace of increase is alarming. Household financial liabilities have also surged, nearly doubling in the past decade to reach 6.2% of GDP in FY24. Simultaneously, household savings have been declining, reaching a new low of 18.1% of GDP in FY24. This combination of rising debt and falling savings suggests that more Indians are relying on credit to meet their everyday needs. The Reserve Bank of India (RBI) is closely monitoring the situation. It's Financial Stability Report (FSR) has called attention to the rise in household debt and the increasing use of consumption loans. The RBI has also taken steps to curb excessive consumer borrowing, including tightening lending norms for personal loans and credit card borrowing.

So, what are the risks associated with high household debt? Increased debt burden can lead to financial stress on households, as a larger portion of disposable income goes toward loan repayment. This can reduce private consumption and limit households' ability to invest in education, healthcare, and other areas that affect social mobility. There is also the risk of a debt trap, where households take on new loans to repay old ones, leading to an unsustainable cycle of debt. The rise in unsecured loans is particularly concerning, as these loans carry higher interest rates and pose a greater risk of default. Delinquencies in the microfinance sector are already on the rise, indicating potential stress among lower-income borrowers.

However, some argue that India's rising household debt is not necessarily a cause for alarm. A State Bank of India (SBI) report suggests that the increase is largely driven by a growing number of borrowers rather than an increase in average indebtedness. The report also notes that a significant portion of loans are used for asset creation and productive purposes. Furthermore, the RBI's ongoing rate-easing cycle is expected to provide substantial relief to households by reducing interest costs.

Ultimately, the question of how much debt is too much depends on various factors, including income levels, asset ownership, and the purpose of borrowing. However, there are some general guidelines that individuals can follow to manage their debt effectively. One rule of thumb is the "40% EMI Rule," which suggests that total EMI burden should not exceed 40% of net monthly income. It is also important to track debt, create a budget, and avoid taking on new debt unnecessarily.

To promote responsible lending and borrowing, a multi-pronged approach involving regulators, financial institutions, and individuals is essential. Regulations should focus on ensuring transparency in lending practices and preventing reckless lending. Financial institutions should prioritize responsible lending and provide financial literacy programs to educate consumers about the risks and benefits of borrowing. Individuals should take responsibility for their own financial well-being by making informed borrowing decisions and managing their debt effectively.