N4S : Rising consumer credit is fueling spending but straining financial stability. UPSC often frames questions around economic growth by linking savings, investment, and financial policies (e.g., PYQ: “Among several factors for India’s potential growth, savings rate is the most effective one. Do you agree?”). Aspirants falter when they treat such topics narrowly—focusing only on textbook definitions of savings and GDP rather than real-world financial trends. This article helps bridge that gap. It explains how rising household debt, BNPL schemes, and unsecured loans are reshaping economic growth, using real RBI data (e.g., household debt-to-GDP rising from 36.6% to 42.9%). The section on Reasons for More Borrowing for Consumption directly answers why savings rates may be declining, while Impact of Rising Consumer Credit shows how it affects banking, real estate, and small businesses—crucial for answering UPSC’s demand for sectoral analysis. 

PYQ ANCHORING : Among several factors for India’s potential growth, savings rate is the most effective one. Do you agree? What are the other factors available for growth potential?

Microtheme: GDP X Saving Rate

In recent years, more people are borrowing money not to buy homes, fund education, or start businesses, but to meet everyday expenses and lifestyle needs. Credit cards, Buy Now Pay Later (BNPL) schemes, and easy-access personal loans have made borrowing effortless—but at a cost. While this boosts short-term spending, it creates long-term financial risks for households and the economy. As people struggle with repayments, banks tighten lending, housing sales slow down, and small businesses face funding shortages.

If more borrowing is fueling consumption rather than wealth creation, what does this mean for economic growth? Will financial institutions and regulators adapt in time to prevent a debt crisis? And most importantly, are we building a culture of financial security or just delaying future distress?

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.

RECENT TRENDS IN HOUSEHOLD DEBT IN INDIA [ FINANCIAL STABILITY REPORT 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.

REASONS FOR MORE BORROWING FOR CONSUMPTION  

1. Stagnant Incomes, Rising Costs – Wages haven’t kept pace with inflation, forcing households to rely on credit for daily expenses rather than long-term investments.
   • Example: India’s real wage growth has been lower than inflation, reducing purchasing power.
2. Easy Access to Unsecured Loans – Digital lending, BNPL (Buy Now, Pay Later), and personal loans have made it easier to borrow for immediate consumption rather than structured long-term investments.
   • Data: Unsecured loan growth outpaced overall credit growth, increasing from 15.1% (March 2023) to 18.7% (March 2024).
3. High Property Prices and Education Costs – Rising housing prices and expensive education discourage borrowing for such investments, as affordability becomes a challenge.
   • Example: Urban housing affordability has worsened, with EMI-to-income ratios exceeding 50% in cities like Mumbai.
4. Short-Term Financial Mindset – Many borrowers prefer instant gratification over long-term financial planning, leading to more spending on travel, gadgets, and lifestyle expenses.
   • Example: Consumer durable loans (for electronics, vehicles, etc.) have grown at over 20% annually, while education loan growth remains sluggish.
5. Tighter Lending Norms for Productive Loans – Banks have become cautious in lending for housing and businesses, while consumption loans are easier to get due to higher interest rates and shorter tenure.
   • Data: MSME loan approvals have slowed down, while credit card spending has surged to ₹1.8 lakh crore per month (2024).

Sector-Specific Impacts of Rising Consumer Credit for Consumption

IMPACT OF RISING CONSUMER CREDIT

Way Forward

1. Financial Literacy & Responsible Borrowing – Introduce AI-powered financial coaching apps and integrate personal finance education into school and college curricula to promote responsible borrowing.
2. Debt Monitoring & Early Warnings – Develop real-time credit health dashboards using AI and fintech solutions to alert borrowers about potential over-borrowing and provide corrective advice.
3. Encouraging Productive Lending – Offer tax incentives or lower interest rates for loans taken for education, housing, or entrepreneurship to shift borrowing from consumption to wealth creation.
4. Regulating High-Risk Digital Lending – Implement AI-based fraud detection and caps on BNPL loans to prevent predatory lending and ensure transparent disclosure of repayment risks.
5. Household Debt Restructuring Programs – Establish a structured debt relief and restructuring mechanism where struggling borrowers can restructure loans with lower interest rates and longer repayment periods.

#Back to Basics (B2B) : CONSUMER CREDIT AND INDIA’S GROWTH POTENTIAL

 Growth Potential in Economy:

Growth potential refers to an economy’s capacity to expand its productive output over time, driven by factors such as capital investment, labor productivity, innovation, infrastructure, and policy support. It reflects how much an economy can grow sustainably without triggering inflationary pressures or financial instability.

Key Determinants of Growth Potential:

1. Investment in Physical & Human Capital – Higher investments in infrastructure, industries, and education improve long-term productivity.
2. Technological Advancements – Innovation and digitalization enhance efficiency and output.
3. Labor Force Participation – A skilled and growing workforce contributes to economic expansion.
4. Policy & Governance – Stable regulatory frameworks and pro-growth policies encourage business confidence and investment.
5. Financial Stability – A well-functioning banking and credit system supports sustainable economic expansion.

Impact of Consumer Credit on India’s Growth Potential

1. Boosts Short-Term Consumption: Increased access to credit enables higher consumer spending, driving demand for goods and services, thus stimulating GDP growth.
2. Reduces Long-Term Savings & Investment: Excessive borrowing for consumption (rather than housing or business investment) lowers household savings, reducing capital formation and long-term economic resilience.
3. Increases Financial Vulnerability: Rising consumer debt leads to higher defaults and financial stress, which can weaken banking stability and slow down credit supply to productive sectors.
4. Enhances Business Growth in Certain Sectors: Consumer credit expansion benefits retail, e-commerce, real estate, and auto industries, creating jobs and economic activity in the short term.
5. Creates Inflationary Pressures: Excess liquidity in the hands of consumers can drive up demand and prices, potentially leading to inflation and forcing monetary tightening.
6. Regulatory & Monetary Policy Challenges: The RBI may have to impose stricter lending norms to prevent credit bubbles, which can slow down credit availability for businesses and infrastructure development.
7. Widening Income & Debt Inequality: Easy credit access often benefits urban consumers more than rural populations, leading to rising inequality and economic disparities.

UPSC Mains Question:

Rising consumer credit in India has led to increased household debt, financial stress, and systemic risks. Examine the key factors driving this trend and discuss sector-specific impacts. Suggest measures to ensure responsible credit growth while maintaining financial stability.

Demand of the Question: Analyze the reasons behind rising consumer credit, assess its sectoral implications, and propose balanced solutions for sustainable credit expansion without financial instability.