Indian households relying on floating-rate home loans face a growing risk of financial distress, according to Prasanna Tantri, Associate Professor of Finance at the Indian School of Business (ISB). Tantri cautions that while these loans may appear affordable today, they transfer substantial interest-rate risk directly to borrowers, unlike the fixed-rate systems common in countries like the US.
Rising Household Debt and Floating-Rate Risks
Concerns are mounting over India's increasing household debt, particularly the exposure of borrowers to fluctuating interest rates. The Reserve Bank of India's (RBI) Financial Stability Report from June indicates that household-sector debt reached 45.5% of GDP by September 2025, a notable rise from 41.3% in March 2025. This level has consistently remained above the five-year average since September 2023.
While the RBI noted an improvement in borrower profiles, with more prime-rated individuals, the primary driver of this debt surge has been non-housing retail loans, accounting for 58.4% of total household borrowings as of March 2026. Consumption-related loans represent nearly half of these borrowings.
The Peril of Unforeseen EMI Hikes
Professor Tantri emphasizes that the structure of Indian home lending places a disproportionate share of interest-rate risk on households. "In India, home loans are predominantly floating-rate, transferring interest-rate risk to households," Tantri stated. "Borrowers access affordability using today’s EMI without fully internalizing how much it could rise. Our near-zero real-rate policy may make loans appear affordable today while creating household distress when rates rise. It is time to end it."
He further elaborated that borrowers often fail to anticipate future increases in Equated Monthly Instalments (EMIs). This oversight can lead to significant financial strain when interest rates climb, making what initially seemed like an affordable loan a source of distress.
India vs. US Mortgage Models
Tantri drew a stark contrast between India's lending model and that of the United States. In the US, fixed-rate mortgages, often with 30-year terms, dominate the housing market. This structure means that an existing US homeowner with a fixed-rate mortgage typically does not see their monthly principal and interest payments increase due to Federal Reserve rate hikes. Instead, the interest-rate and refinancing risks are absorbed by lenders and other parts of the mortgage-finance system.
This fundamental difference means that while US lenders price loans based on expected interest rate paths and bear the risk, Indian households are directly exposed to market fluctuations, making them vulnerable to economic shifts and policy changes that affect lending rates.