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Motilal Oswal Report
According to the recent data published by the Reserve Bank of India, household liabilities surged in FY23, as annual borrowings stood at 5.8% of gross domestic product (Rs 15.8 trillion) last year, the second highest since the 1970s.
Accordingly, India's household debt surged to 48.1% of their income in FY23, from 43.3% in FY20 and ~35% of GDP a decade ago. A look at the key drivers of bank loans to households confirms that non-housing personal loans have increased at the fastest pace since 2022, followed by housing loans, business loans and agricultural loans. As highlighted in our recent report, non-mortgage household debt in India in FY23 was similar to that in the U.S., Canada, Japan, China and Australia.
Irrespective of the key drivers of the surge in household debt, it is obvious that such a massive level of borrowings in just one year do not pose any threat to India's financial or macroeconomic stability. But what if it continues for the next few years? How long can it sustain? What is the sustainable level of household debt in India? In this note, we answer these questions and more.
We adopt two different approaches. First, we analyse whether higher household debt in recent years is led by credit widening (i.e., more borrowers) or credit deepening (i.e., higher credit per borrower). The higher the share of the former is, the better it is.
Second, we present our calculations of the debt service ratio for Indian households. DSR measures the share of income used to service their loans (i.e., the ratio of interest payments plus amortisations to income). The lower it is, the better it is.
Our analyses confirm that a majority of the growth in household debt in the past decade was driven by ‘credit widening' and not ‘credit deepening'. It is clear that as much as 90% of the growth in household debt in the past decade was attributed to credit widening. This methodology, however, has serious limitations.
On the contrary, we find that DSR of Indian households is ~12%, similar to that in Nordic countries (where household debt-to-income ratio is 3-4 times to that of India), and more than that in China (8.5%), France (6.4%), the UK (8.6%) and the U.S. (7.7%), all of which have household leverage of more than 100%. A combination of a higher interest rate and lower tenure of loans makes DSR much higher for Indian households, even with a debt-to-income ratio of less than 50%.
One of the most effective ways, in our view, to reduce the obligation burden for Indian households, and thus raise the leverage threshold, is to increase the residual maturity profile of borrowers. An increase in the maturity by six months (or 0.5 year) can push the threshold of household leverage by more than 4% of income. At the same time, a reduction in the effective interest rate by 1% raises debt by just 1.6% of income. As highlighted earlier, a falling savings ratio in India makes it difficult to aim for a lower interest rate over a long term.
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