Indian household debt – How bad is it?

What do you do when your boss doesn’t give you a pay hike but the cost of living continues its upward swing? You have to borrow money either from a bank or from friends.

In the last few years, low-interest loans lead to a buying boom and heavy consumer demand. According to India’s largest national bank State Bank of India, the national economy is paying the price of cheap money as debt problems in Indian households have increased by 58% in the past 5 years. The household savings have dropped by 6% in 5 years, which is the heartbeat of the economy. Consumer debt has gone up by 58% to Rs 7.6 lac crore in the past 5 years, all thanks to low-interest loans.

“Declining savings, especially household savings, is a major challenge for the economy and is leading to structural growth slowdown,”
Said – Devendra Pant, chief economist, India Ratings and Research.

A sneak peek at the Indian household debt industry

Each individual is carrying a debt load of about Rs 16,239 in India.
Home loans constitute 52.4% of the total household debt in India.
Personal loans comprise 31% of the total consumer debt.
Credit cards have captured 3.9% of the total consumer debt.
Vehicle loans constitute 3.4% of the total household debt.
Student loans constitute 3.2% of the total debt.
Fastest growing debts are credit card debts and personal loan debts. They constitute 35% of the total consumer debt.

Indian household debt statistics – 2013 – 2018

Financial Year	Household Debt
2017-18	Rs 6.74 lac crore
2016-17	Rs 3.75 lac crore
2015-16	Rs 3.91 lac crore
2014-15	Rs 3.77 lac crore
2013-14	Rs 3.59 lac crore

If you follow the table closely, then you’ll realize that India’s consumer debt has jumped 1.8 times from 2016-17 to 2017-18. In the last 5 years, household debt has increased by 13%, which is not low.

Indian household debt in 2019 – How bad is it?

There has been an increase in the level of credit card debt and personal loan debt in the financial year 2018-19. You can get a good idea about this from the table given below.

	FY 2013-14	FY 2018-19
Home loans	9.47%	13.13%
Student loans	1.09%	0.86%
Personal loans	3.61%	6.90%
Vehicle loans	1.92%	2.46%
Credit cards	0.45%	1.05%
Consumer durables	0.23%	0.04%

Few factors are pulling up the consumer debt level in the country. For instance, increased usage of credit cards is putting additional financial liabilities on people. But then again, there is a sharp decline in the consumer durables in 2018-19 owing to the lenders’ lack of faith in consumers’ capability of paying off the loans. Home loans have also shown steady growth. But the increasing interest rates are raising questions in the minds of borrowers. On the other hand, banks are hesitating to issue student loans due to the high default rates and lack of margin requirements.

Personal loan debt has almost doubled during FY 2018-2019. Borrowers use these loans for sponsoring trips, weddings, and paying off debts.

How to deal with consumer debt in India

Credit analysts, lenders, financial experts, and debtors are quite stressed about how to deal with household debt especially after the unemployment rate went up to 45-year high in India. Both lenders and debtors are worried. Lenders are skeptical about issuing fresh loans whereas debtors are looking for ways to pay off debt.

So what should consumers do now? How should they pay off debts? In India, it’s easy to get into credit card debts especially due to their high-interest rates. The average annual interest rate on credit cards is 41%, which is higher than other types of loans. This table will help to make my point clear.

The average interest rate on the top-grossing credit cards

Credit card issuer	Average APR
IndusInd	46%
Axis Bank	43%
RBL Bank	42%
ICICI Bank	41%
HDFC	41%

If you’re unable to repay your credit card bills, then there is one thing that you can do. You can settle your credit card debts with banks to reduce your debt burden. But for that, you have to negotiate with banks and confess your inability to honor the credit card agreement.

When you settle debts with banks, they forgive a portion of the total outstanding balance. This helps you to save money.

Suppose, you bought an iPhone at Rs 70,000 with a credit card. Initially, you thought that you would be able to pay off the debt with easy monthly installments. However, after making a few installments, you see that you aren’t able to cope with payments due to a sudden financial crisis. What will you do in this situation? Well, you can do 2 things.

You can sit quietly and let the credit card debt soar.
You can settle credit card debts with the bank and be debt-free.

The first option would only sabotage your financial life. The second option would not only help you to get out of debt but also allow you to save money.

How debt settlement works in India

You can call the bank and let them know about your situation. You can inform the bank that you can’t pay off the entire balance due to financial crunch. So if the bank agrees to waive off a certain amount, then you can try to clear your dues. Now, if you think from the bank’s perspective, it’s a financial loss for them. But they would much prefer to get something instead of nothing from you.

Yes. You have to negotiate hard with the bank because no one would want to lose money. You have to be calm and patient. If you don’t have good negotiation skills, then it’s better to hire a professional debt settlement company to settle your unsecured debts.

Final words

If there is anything that can give you some consolation is that India’s household debt-to-GDP ratio is less than the other members of the BRIC (Brazil, Russia, India, and China) countries.

Brazil has a 26.7% debt-to-GDP ratio, South Africa has a 33% debt-to-GDP ratio, and China has 50% debt-to-GDP ratio. Russia and India have 16.5% and 11.2% respectively. Apart from that, there’s hardly any good news for Indians. Household debt is increasing at a steady rate of 16.9% in the last 4 years. Consumers should be extremely careful while spending money because the recession is expected to hit the US within 12-18 months. Once the recession hits America, the Indian economy would also get affected, especially the job market. It’s better to get and stay out of debt to avoid massive financial problems in the near future.