Indian households seem to be saving less while spending more — and increasingly by borrowing.

Combined with slowing salary growth and shrinking real incomes, this could pose a challenge in the years to come.

The latest Financial Stability Report shows that the Indian household debt-to-GDP ratio is at 45.5%, a historic high — a level it has reached after steadily trending upward. And 58.4% of total borrowings as of March 2026 were non-housing retail loans, indicating a disproportionate share of consumption loans.

“Consumption-related loans remained the primary driver of household borrowings, followed by loans for productive purposes, whereas borrowing for asset creation expanded at a relatively slower pace,” the RBI report said.

Since the ratio has been inching up every quarter, experts said it points to growing pain in the system. As more households take on loans to consume, they risk falling into a cycle of debt and mounting interest costs. This could become a worrisome factor at both the macro and micro levels.

Increased consumption through loans provides a short-term boost to the economy. Over the long run, however, it can weigh on household finances and increase delinquency levels.

"When a household takes on long-term debt, if it's for housing, or if it's to build a business, even if it's for an educational loan that actually builds future incomes. That’s a loan that goes towards building an asset, and which will generate returns. But if you're using debt, long-term debt, or medium-term debt to pay for your daily groceries, or your utilities, or living expenses, that is not a healthy situation,” says Ajit Ranade, an economist, who told The Core in a podcast.

Loans That ‘Buy’ Not Build

A disproportionate share of loans seems to be going towards purchases that do not necessarily generate returns in the future.

A Home Credit survey, ‘How India Borrows In 2025’, found that about 46% of loans are being used to buy smartphones and home appliances.

Another 25% of the credit wallet is going towards starting or expanding an existing business, while 12% is being used for home renovations. Education, auto purchases and medical emergencies account for 4% each, while buying property makes up just 2%.

The growth of integrated finance, particularly through e-commerce platforms, is also gaining traction, with credit increasingly being offered at the “moment of purchase”.

Ponmudi R, CEO of Enrich Money, said that a wide range of borrowing products — including personal loans, credit cards, vehicle financing and digital lending — have expanded rapidly in recent years.

He cautioned that if such borrowing is increasingly used to fund consumption like lifestyle spending, travel, gadgets and daily expenses rather than income-generating or wealth-building assets, it could raise concerns about household financial health. “Consumption creates short-term economic growth, but it does not necessarily improve a family's balance sheet,” he said.

The RBI had tried to curb the rapid growth of unsecured retail loans by raising their risk weight to 125% from 100% in late 2023.

Since then, however, measures aimed at boosting consumption — including GST reductions, lower income taxes under the new tax regime and open market operations to inject liquidity — have also supported consumption as well as leveraged consumption.

Not Just What, But Who

Economists also see a pattern in which a growing share of loans is going to a smaller pool of borrowers, potentially increasing the risk of delinquencies.

“My botheration about household debt levels is that its concentration of debt amongst people eligible for it. A large number of earning workers make around Rs 1.7 lakh/annum, which leaves only 3-4% eligible to take loans,” said Dhananjay Sinha, CEO and co-head of institutional equities at Systematix Group.

Ranade also pointed to a higher concentration of consumption-fuelling loans among households earning less than Rs 10 lakh a year.

“These are the very households for whom, if there is a macroeconomic shock, like an illness in the family or somebody losing a job or some such thing, they will find it very difficult to absorb such a shock and be able to keep servicing the loan on repayment and EMI and so on,” he added.

The trend is also visible in the growth of gold loans.

The RBI report found that as gold prices rose, the same borrowers were able to use the higher value of their gold to secure larger loans and roll over existing debt.

That could point to a system in which borrowing itself is contributing to financial distress, prompting some borrowers to seek more loans.

RBI data, however, suggests that household debt has not yet become a broader source of stress. Despite the increase in the number of loans, a larger share of prime and above borrowers retained their risk categories in 2025-26 compared with 2024-25.

Near-prime and prime borrowers saw more upgrades, while prime-plus and super-prime borrowers experienced a higher share of downgrades. Even so, most remained within the

Most borrowers are not in the red yet.

Show Me The Salary!

A key factor that could alter the health of a rising loan book is compensation. Since consumption-related loans are not necessarily income-generating, the ability to service a loan directly depends on salary growth.

As of now, the numbers are not encouraging — in fact, salary growth has been moderating.

E&Y’s Future of Pay 2026 report said that actual salary increment in 2024 was at 9.6%, which went down to 9.3% in 2025 and is projected at 9.1% in 2026.

Across the 16 sectors covered, 15 are projected to see lower percentage salary increments, with GCC employees the only exception.

Sinha said that many corporate non-finance sectors were seeing a slowdown in sales and margin erosion, and going in for ‘economisation of compensation’.

“Sectors like FMCG, IT and banking sectors are rationalising the workforce, using technology and automation to optimise spending on compensation. Rural wage growth is modest too, and adds to the risk in the urban formal sector. It could result in a reduction in repayment capacity,” he said.

Salary growth has been slowing down every quarter too.

“Quarterly corporate results show that growth in employee compensation decelerated to 6% in 4QFY26, with an eight-quarter average of 7% — the lowest since FY14. This points to continued strain among households dependent on the formal sector,” a Household Situation Tracker report by Systematix said.

While urban markets are expected to see fatigue, rural wage growth is even more fragile, the report found. The report estimated that the underlying rural wage growth slowed to approximately 4.3% YoY in March 2026, its weakest pace in four years. It also adds that the reported 17% figure significantly overstates the true state of wage growth.

Rising inflation and stagnant income growth lead people to take more loans.

“Prospects of near-zero or negative real rates effectively favour leveraged consumption amid falling real income — myopic, especially since this demand recovery is K-shaped and import-intensive. It discourages savings while pushing household debt to around 46% of GDP, with non-housing debt at a high of 58.4%. This translates into around 60% of household income, an alarming level given the languid real income situation. The dynamics are not favourable for retail lending and might lead to default risk,” Sinha added.

Why Does It Matter?

Another factor that can lead to debt stress is interest rates. The current RBI governor, Sanjay Malhiotra, has reduced interest rates five times in 2025, effectively reducing the repo rate to 5.25% from 6.5%.

Yet, interest rate transmission works differently in India than in other countries.

Countries like Canada, Australia or Italy have household debt that is closer to 100% of GDP.

Unlike in India, in those countries, a large part of it is mortgages, housing debt, or household business. In addition, these countries have a very active and liquid secondary market for mortgages wherein any interest rate changes at the Fed level are transmitted quickly from short rates to long rates on housing loans and sovereign treasury bonds.

“The signalling mechanism works very efficiently. In India, the policy rate is at 5.25%. The treasury bond, the 10-year long rate, is around 6.8-7%. This gap itself is unnaturally high. Bankers call it a steep yield curve; that is, the overnight rate fixed by the policy, or regulated rate, is 5.25%. Long-term loans are at the sovereign rate of 6.7-7%. This is a spread of 150 basis points, when normally it should be just barely 60-70 basis points,” said Ranade.

For debt-ridden Indian households, any relief that might come at the policy level, might transmit slowly – so slowly that it cannot remove the distress in terms of lower EMIs and more such.

The Macroeconomic Pain

Indian households’ rising debt could impact the nation’s wellbeing as well. While other countries can handle higher household debt-to-GDP ratios, India must keep it benign, suggest experts.

“Overall, the current debt level is not yet an immediate red flag, but it is certainly a trend that deserves close attention. The quality of borrowing matters far more than the quantity. But if a larger share is directed toward consumption without corresponding income growth, it could become a structural risk for both households and the broader economy over the coming years,” said Ponmudi.

An extreme stress in the household books, if spread to a large extent, can have a domino effect at the macroeconomic level.

Banks might have to suffer losses if delinquencies go up, will have to tighten lending, which can reduce liquidity and spending, which could lead to lower revenues and could even result in a slowdown.

High household debt might also slash household savings, which have been progressively going down. “Households ultimately have been the stable source of funding the fiscal deficit at the centre as well as at the states. And the household savings, financial savings ratio, net financial savings, has been down to 5%. Again, a historic low,” said Ranade.

India is at the juxtaposition of a historic high of household debt: GDP ratio and household savings at a historic low. The country, which has always veered towards savings, has been altering track to leveraged consumption – thanks to easy credit availability.

While it isn’t challenging the state of the banking system as of now, economists believe that the warning signals are all blinking.