Why in the News?

The Reserve Bank of India (RBI) Financial Stability Report (FSR), 2024 has highlighted an increasing household debt burden and a concerning rise in consumption-based borrowing.

About Financial Stability Report (FSR):

• The FSR is published biannually (June & December) by the RBI.
• It reflects the collective assessment of the Sub-Committee of the Financial Stability and Development Council (FSDC – headed by the Governor of RBI) on risks to financial stability and the resilience of the financial system.
• The Report also discusses issues relating to the development and regulation of the financial sector.

Key Highlights of the Financial Stability Report (FSR) 2024:

• Rising Household Debt-to-GDP Ratio:

• • Household debt-to-GDP ratio: 36.6% (June 2021) → 42.9% (June 2024).
  • Household assets declined: 110.4% (June 2021) → 108.3% (March 2024), indicating more borrowing for consumption.

• Credit Growth Trends:

• • Total credit growth (March 2024): 15.4% YoY.
  • Prime & Super-Prime borrowers: 66% of total loans, reducing risky lending.
  • Super-prime borrowers mainly borrow for asset creation, while sub-prime borrowers rely on loans for consumption.

• Rising Unsecured Loans & Financial Stress:

• • 50% of sub-prime loans are for consumption; 64% of super-prime loans are for asset creation.
  • Credit card delinquencies: 1.8% (Sept 2023) → 2.4% (Sept 2024).
  • Personal loan defaults: 3.2% (Sept 2023) → 3.9% (Sept 2024).
  • Low-income households rely more on credit cards & personal loans than secured loans.

• RBI’s Measures to Curb Consumer Borrowing:

• • September 2023: RBI raised risk weights on unsecured loans, slowing credit expansion.
  • Auto loan growth fell: 18.2% (March 2023) → 14.5% (March 2024) due to tighter lending norms.

• Consumption Loans & Economic Impact:

• • More borrowing for consumption, less for housing, education, or business investment.
  • Rising debt repayment reduces spending, weakening GDP growth.

• NPA Risks from Consumer Credit:

• • Unsecured loans growing faster, raising default risks.
  • Half of borrowers with credit card/personal loans also have home/auto loans—defaulting on one triggers loan classification as NPA.

• Fintech’s Role in Rising Debt:

• • Digital lending & BNPL schemes enable easy credit but increase financial vulnerability.
  • Regulatory oversight needed to prevent excessive debt accumulation.

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