Indebtedness Continues To Rise Among Indians: What’s Driving Up Loan Uptakes?

What would you do if your expenditures exceed your income, and your savings are significantly drying up? You end up taking credits or loans. A recent report by Bank Bazaar reveals that there’s a rise in indebtedness among Indian households. Based on a survey of 1,529 working professionals aged between 22-45 from six metro and over 18 Tier 2 cities, the data shows that increasing expenses and slow income growth are pushing many Indians to increasingly rely on loans to meet their basic and other financial needs.

Noting the changing credit behaviour of both metro and non-metro citizens, the report cites many reasons behind the uptake of loans. 

Tale of Two Indias: A Look At Credit Disparities 

Taking comparative data of two Indias: the metro and non-metro cities, the report highlights that the proportion of metro residents taking new loans in the past year stands at 56 per cent while non–metro people reported a slightly higher rate at 59 per cent. 

Moreover, the percentage of debt-free individuals in a metro city is at a mere 14 per cent, marginally higher than 12 per cent in non-metro. This shows a growing reliance of people, both in metro and non-metro cities on credit.

The report highlights that non-metro residents face the issue of limited job opportunities and flatter income growth. Hence, they are finding themselves more dependent on borrowing. On the other hand, metro dwellers have seen better career growth and salary increments, but still they face the trouble of rising cost of living, leading to a continued dependence on credits.

What Is Driving Up Such Loan Uptakes?

The report notes that across cities, the primary reason behind an increase in loans is driven by the shifting aspirations of Indians mainly on these factors: Wealth, Health, Relationships, Fame, and Personal Growth.

A significant portion of the loans are taken to meet every day needs rather than any extravagant purchases. Small-ticket loans (under Rs 25 lakh) take up a big space in the borrowing landscape standing at 91.2 per cent of the total lending burden this year. This is a rise from 88 per cent recorded in 2022.

However, borrowing priorities differ based on geography. In the eastern parts of India, the primary reason behind loaning is education. In the south, auto loans for two to four-wheelers rank up at the top of the list. Both these regions have also witnessed a rise on borrowing for medical emergencies, while metro residents are more likely to use credit for their luxury spends or to fund vacations.

The north and west regions are more inclined towards borrowing for homeownership and holiday expenditures.

Low Income, More Expense

A key driver of growing indebtedness is the widening gap between expenses and income growth. The data shows that 54 per cent of respondents have seen their expenses rise by Rs 10,000 to Rs 50,000 per month over the past year. Only 43 per cent have seen a rise in their income.

Such financial strain is particularly visible in non-metro cities where around 35 per cent of individuals have seen a drop in savings compared to 31 per cent in metro areas.

In addition to this, the respondents have also citied rising cost of essentials like food and groceries as pressure points on their household budget. 49 per cent in metros and 50 per cent in non-metros have seen strain on meeting essential needs. Such a financial burden has forced many to dip into short-term credit solutions like credit cards and Buy Now Pay Later (BPNL) schemes. 

Nearly 45 per cent of non-metro individuals and 39 per cent of metro dwellers rely on such short credit schemes to cover their monthly expenses. However, non-metro residents are finding it tougher to repay their loans in comparison to metro residents (at 18 per cent). 

Is There Any Solution For This Indebtedness?

While small-ticket loans continue to dominate the borrowing sector, the report notes that the Reserve Bank of India’s (RBI) efforts to moderate the credit growth, particularly in the unsecured credit market, would have an impact eventually. A steady rise in borrowing, taking into view the regulatory measures, shows that people may be getting more comfortable with loans and leveraging the credit market for their daily needs.

 The report also notes that the number of individuals without any credit liability has dropped from 19 per cent in 2022 to 13.4 per cent in 2024, which points to a growing reliance on loans. Still, 44 per cent of metro residents and 36 per cent of non-metro dwellers have expressed a desire to become debt-free in the coming year. This favourably shows that people are aware of the debt risks and are also keen to avoid high debt levels to manage their finances.