From farm loans to retail loans
Recent news items, a book, and few surveys are scary, and dreadful. Retail loans, which include those for personal reasons, consumer purchases, credit card dues, homes, vehicles, and so on, are the major causes for debt headaches of the banks. They account for the largest portion of the annual write-offs due to non-payments. A new book warns that Indian families are in a debt trap, and “carry one of the highest debt burdens in the world… surpassing even consumption-heavy economies like the US, and debt-fuelled growth stories like China.”
Several surveys indicate that Indians are going on a debt binge, not to acquire and build assets like homes, but to pursue aspirations, desires, whims, and fancies. Vacations, which include travel and hospitality, comprise the largest component of unsecured retail loans. Credit purchases stand at just over 10 per cent, but that is only because smart and scared consumers run from pillar to post to roll over credit by paying the minimum balances, and acquire huge interest in the bargain. The loans are, in a sense, ever-greened, and bloat.
Let us start with some of the stark facts. Apart from housing loans, the loans by families, as a percentage of GDP, zoomed by 10 per cent to nearly a third within eight years. In other words, 40 per cent of the annual incomes services the payment of the loans. In 2024-25, as per data given in Parliament, Indian banks wrote off INR 1.72 lakh crore, of which retail (family-linked loans) accounted for the largest share of more than INR 45,000 crore, or more than a fourth. Ironically, the amount was double the write-offs for the farm sector (INR 22,000 crore).
According to an official report (December 2024), 45 per cent of the household borrowers are classified as sub-prime, or unable to pay the loans. More importantly, half of the loans fund consumption, and not investments or productive assets. “The affluent segments of the middle class are borrowing for aspirational purchases like premium smartphone, and lifestyle upgrades, while less affluent households turn to debt for essential needs like healthcare and education,” states the book. In essence, one can segregate household loans as productive (homes, vehicles), future-income (education), lifestyle (bigger TV, better phone), and honour and self-respect (marriages, home renovations).
Unsecured retail loans, which are not backed by collateral, constitute more than half of the written-off retail loans in the last financial year, and private banks contributed more than three-fourths of them. One can assume that such banks, in a bid to boost high-value, high-profit loans (personal loans carry the highest interest), push the products even to those, who may be sub-prime, and unable to pay. This is evident from the unwanted calls for debt and credit cards, as well as personal loans. Worse, this situation emerges despite the central bank’s curbs. Something is clearly not working, and going wrong.
What is crucial is like the Americans not long ago, Indians are saddled with multiple loans, and they juggle incomes to pay them. As demand for loans rises due to multiple desires by multiple members, the end-result is default. Take the case of this three-member Mumbai-based nuclear family, with double incomes, and one kid. At any given point in time, it has an ongoing and sizable EMI for home loan, small one for a laptop or smartphone, and minimum payment(s) to roll-over one or two credit card dues. Bulk bonanza (gratuity, bonus, and bunched-up increments) clean up the credit cards, or prepay loans.
Even worse is that Indians are not saving. Yes, urbanites transformed into smart investors, and women have taken to mutual funds and stocks, like fish to water. But more importantly, more have turned into consumers, who feel savings is a waste of
money. Either use money to grow money, or burn it in the present. Net household
savings, as a percentage of income, “hit a 50-year low in FY 2023, and despite rising to six per cent in FY 2025, is still much lower than what it was historically…. Indians have become world champions in borrowing money, lots of it, non-stop, and at high cost,” states the book.
However, one cannot merely blame aspirations. There is real stress as far as family incomes are concerned. Jobs are scarce, especially for the youngsters and first-timers, whose aspirations are as high, or higher than those in the 30s and 40s. Real wages are compressed, which leaves little for discretionary expenses. As access to loans goes up, and payments are easy, despite high interest, debt is the only option. Nuclear families, strained relations, and lack of ‘friends,’ push people to borrow from the banks rather than from close ones. Once the cycle starts, it has a life of its own, an ongoing momentum and motion.
According to the new book, Covid and post-pandemic periods were the major middle-class inflexion debt-points in the recent past. “After this shock, India’s non-housing household debt (i.e., household debt minus home loans) has surged at a rate faster than any of the countries shown in the chart. As a result, India has now surpassed developed countries that are traditionally considered to be consumption heavy (like the US) as well as developing countries that have typically relied on bank credit for development (like China),” states the book.
Two trends will stand out if the debt momentum continues. As is evident now, banks will become safer, and insist on secured loans. Recent data shows that gold loans have emerged as the second-largest ones among retail loans, or higher than unsecured personal loans. But this may be because of the unprecedented, even shocking, rise in gold prices, despite the recent fall since January 2026. Lower loans may enable the banks to correct the massive mismatch between savings and loans, higher credit to industry, families, and farms compared to inflows.
In addition, Indians, especially the younger ones, may either turn into defaulters, and face the consequences for the rest of their lives, or curtail their lifestyle, and kill their dreams for years. The shift from credit cards to only debit cards is visible in some families. Thus, they do not buy the latest gadget, or take an overseas trip that regularly. This makes them, to some extent, hate their lives, when they compare it to their peers, friends, and relatives. Children may become desperate and frustrated, and one is not sure how this will pan out in the future.
