India's household debt servicing costs among the lowest in the world

Indian households’ net financial savings fell as much as four percentage points in the past two years as they ploughed it to build real assets such as homes and vehicles. While that has raised the indebtedness of people, economists say their ability to service debt is high compared with many major economies.

Official data on household net financial savings indicates that it fell to 5.1 per cent of GDP in 2022-23 from 11.5 per cent in 2020-21, well below its long-run annual average of 7.0-7.5 per cent. This fall was driven by a rapid rise in financial liabilities ( borrowings by households) from 3.8 per cent of GDP in 2021-22 to 5.8 per cent in 2022-23.

Since a large part of the liabilities was used in funding in physical assets creation -mortgages and vehicles- the overall savings of households may still hold steady with a compositional shift in favour of physical savings a recent analysis by the Reserve Bank said.


But comparing data from the Bank for International Settlements and RBI's own estimate on India's debt service ratio, India’s household debt service ratio is one of the lowest compared to many major economies. India's debt service ratio at 6.7 percent as of March 2023 remains is lesser than USA's 7.8 percent, Japan's 7.5 percent, UK's 8.5 percent, Canada's 14.3 percent and Korea's 14.1 percent.

Historical data show a negative correlation between Correlation between the three-year Change in household debt up to year and the subsequent growth in private final consumption expenditure because of rising debt repayment obligations., household debt in India is much lower than in other emerging market economies.

To calculate India's debt service ratio, the RBI considered retail loan data from a survey of 12 major scheduled commercial banks comprising about 80 per cent of the retail loan portfolio at the system level. The weighted average effective rate of interest stood at 9.7 per cent in March 2023 and residual maturity of retail loans was 12.7 years on the existing stock of debt.

Accordingly, the debt service ratio of Indian households is estimated at 6.7 per cent at end-March 2023, edging up from 6.6 in March 2022, but still lower than 6.9 percent in March 2021.

Despite the recent increase in financial liabilities, India’s household debt to GDP remains below the average of 48.3 per cent for emerging market economies even under various stress scenarios of a surge in interest rates from the current estimated 6.7 percent to 8.5 percent or even in an extreme scenario of a 21 percent drop in income levels, which again impacts debt servicing levels, a sensitivity analysis by the economists at the Reserve Bank of India indicated in the central bank's latest financial stability report.

The RBI analysis assumes significance against the backdrop of the recent tightening cycle of monetary policy which has resulted in rising mortgage rates and tighter lending standards which watnd of a concern for household debt levels.