India's long-standing model of deposit-led credit growth is facing significant headwinds, as a new report from Deloitte India reveals a concerning trend of declining household savings coupled with rising debt. This shift poses potential risks to the nation's financial stability and its ambitious economic expansion targets.
Household Savings Under Pressure
The 'State of Financial Services in India 2026' report by Deloitte indicates a notable decrease in gross household financial savings, which fell from 11.3% of GDP in FY19 to 10.8% in FY25. Concurrently, household financial liabilities have climbed from 4.1% of GDP to 4.7%, peaking at 6.2% in FY24. These figures highlight a structural change in how Indian households manage their finances, moving away from traditional savings patterns.
Historically, household savings have served as the bedrock of India's financial system, providing banks with a steady stream of deposits that are then converted into loans for businesses and consumers. However, evolving consumption and investment behaviors mean banks can no longer rely on this funding source to the same extent.
Implications for Credit Growth and Economic Ambitions
The report underscores that credit growth has consistently outpaced deposit mobilization, compelling banks to increasingly resort to more expensive short-term market borrowings. This reliance on costlier funds could impact lending rates and overall economic activity.
Former HDFC Bank managing director Aditya Puri, in the report's foreword, emphasized the critical need for more efficient debt markets to bridge the funding gap essential for India's economic expansion. He stated, “Changing household consumption and savings patterns mean that we can no longer rely on bank deposits to the extent we have in the past to fund rising credit demand.”
India aims to achieve a GDP of ₹2,700-2,800 lakh crore, or a $30-35 trillion economy, by 2047. This ambitious goal necessitates substantial investments across various sectors, demanding the financial system to channel larger volumes of credit and capital more efficiently.
Recommendations for Financial Stability
To sustain lending growth and support future economic phases, Deloitte recommends several key measures:
- Development of deeper and more efficient debt markets.
- Improved liquidity management within the financial system.
- Stronger integration between money, bond, and derivatives markets.
- Broader participation in bond markets.
- Better price discovery and more market-driven interest rates.
The report also touched upon the changing landscape of household borrowing, noting increased scrutiny on unsecured retail loans following the Reserve Bank of India's decision to raise risk weights in November 2023. Unsecured loans accounted for 53.1% of retail loan slippages, and consumer borrowing patterns show a shift, with a significant portion of personal loans now used for travel and vacations.
As liquidity conditions have tightened post-pandemic, the findings signal a crucial structural transformation in India's financial landscape. Policymakers, regulators, and financial institutions are urged to closely monitor these trends to ensure the country's credit engine finds new, sustainable sources of fuel for its growth ambitions.