The debt explosion in middle-class India
India's net household savings are at a 48-year low, driven not by falling savings but by a dramatic, post-covid surge in non-housing borrowing, often for consumption and lifestyle upgrades, trapping the middle class in high-cost debt.
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Over the past decade, a silent crisis has been unfolding in India's middle class. While incomes have stagnated and job opportunities have dwindled, borrowing has surged at an unprecedented rate.
The Reserve Bank of India (RBI) has highlighted that net household savings in India (i.e., household savings less household borrowings) as a percentage of income is at its lowest since 1977. The reason for this figure plunging over the past five years is not so much falling savings; it is soaring financial liabilities that are to blame. Indian households have become world champions in borrowing money—lots of it, non-stop and at high cost.
Until 2019, India’s non-housing household debt remained broadly aligned with that of its international peers. Now, however, Indians carry one of the highest debt burdens in the world, excluding mortgages—surpassing even consumption-heavy economies like the United States and debt-fuelled growth stories like China.
The covid pandemic marked an inflection point, and unlike other nations where borrowing subsequently moderated, India’s trajectory continued its steep ascent. Today, non-housing household debt as a percentage of household income stands at 32% in fiscal year 2025 (FY25), up from 23% in FY17. For borrowers caught in this cycle, the mathematics are brutal: nearly 40% of annual income is now consumed by debt servicing alone.
Consumption focus
What makes this borrowing binge particularly alarming is its composition. These are not loans funding productive assets or wealth-creating ventures—middle-class workers are upgrading their lifestyles by borrowing. Nearly 50% of Indians are open to using personal loans to improve their current lifestyle. A third are willing to take a personal loan to buy consumer durables, such as mobile phones, televisions, and washing machines. Interestingly, productive assets, such as two-wheelers (23%), cars (12.5%), houses (12%), and gold (10.5%), come further down the pecking order, according to consumer finance firm HomeCredit.
Whilst home renovation is the most common reason for taking a personal loan, remarkably, vacationing is the second most common reason for taking such a loan. As shown by the chart above, more than a fifth of personal loans in India are taken for the purposes of going on holiday. In fact, three-quarters of such borrowers (who borrow to holiday) are salaried professionals, according to data from consumer credit and finance aggregator Paisabazaar.
Specifically, if we examine the RBI’s Financial Stability Report from December 2024, it reveals that not only have consumption-related loans increased in the past several years, but also that 45% of all borrowers are subprime, and nearly half of their loan requirements are for consumption (see the charts below).
Credit expenditure
Data also shows a rising trend of people using credit cards and EMIing (Equated Monthly Instalment) their way through even small-ticket transactions. If we were to look at the data for credit card spends per card, these have gone down over time, while the number of transactions per card has actually risen (see chart below).
Exhibit 4: Average credit card spending has fallen even as the number of credit card transactions has soared
Source 4: Avendus-Spark Institutional Equities
The consequence of all this borrowing is a debt trap of staggering proportions. Nearly half of Indians taking personal loans have multiple outstanding loans, often juggling borrowings from three or more lenders simultaneously. The RBI’s June 2025 Financial Stability Review says that 68% of individuals taking a personal loan of less than ₹50,000 have more than three live loans at origination, and 12% of all borrowers have loans from three or more lenders. Taking a weighted average of the interest rates that these households are paying on their various loans would show that their effective interest rate is north of 10% (assuming that this is a ‘prime’ borrower catered to by India’s banks). Salary surveys indicate that middle-class household incomes are rising at a rate of high single digits at best. Therefore, mathematically speaking, a large proportion of India’s middle-class households are stuck in a debt trap where their annual debt burden is likely to grow faster than their income.
Saurabh Mukherjea and Nandita Rajhansa work for Marcellus Investment Managers.
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