Rising household debt in India that has climbed to 43.1% of gross domestic product as of March 2025, up from 41.3% at end-March 2025, is a cause for concern, according to Professor Dirk Bezemer from the University of Groningen, who co-authored a paper, “Credit Policy and the 'Debt Shift' in Advanced Economies” published in 2021.

The abstract of the paper states: “The decline in the share of bank credit to non-financial firms since the 1990s, relative to credit for real estate and financial asset markets, has raised concerns over economic growth and financial stability and sparked renewed interest in credit policies, instruments and institutions.”

The paper examined the empirical relationship between credit policy and credit allocation in the 1973–2005 period for 17 advanced economies. The study, which included home ownership polices favouring mortgage markets, revealed that a decline in credit policies is significantly associated with a lower share of lending to non-financial firms.

Drawing parallels to the post 1980s pivot in western economies wherein banks shifted lending from productive businesses to households, eroding growth and fuelling crises, Bezemer sees similarities in India’s data.

India's household debt has climbed to 43.1% of gross domestic product as of March 2025, up from 41.3% at end-March 2025, much above the five-year average of around 38%. Non-housing retail loans, comprising personal loans and credit cards, constitute a majority of household borrowing at over 55%. Over the past decade (FY16-9MFY26), against a dismal CAGR of 4.10% clocked by industry credit from Rs 27.31 lakh crore to Rs 40.81 lakh crore, personal loans, in contrast, surged from Rs 13.92 lakh crore to Rs 62.53 lakh crore, clocking a blistering 16.21% annual growth.

Let it sink in: personal loans (of which home loans make up for 50%) stand higher than industry credit in just a decade!

Bezemer, in an interaction with Fortune India, confirmed India's path resembles the "debt shift" regime. "Certainly," he stated when queried on stagnant industrial credit amid personal loan surges. The 2021 paper tied the erosion of tools such as credit controls and state banks to this misallocation. India's reliance on priority-sector mandates, without broader allocation mechanisms, could create vulnerabilities.

The study indicates that unsecured household debt might be even more destabilizing given its shorter maturities and higher procyclicality. In the context of India, Bezemer has a mixed response: "Yes and no," he states. Shorter maturities and procyclicality could trigger faster defaults among lower-income borrowers, but without mortgage-like asset price feedback loops, systemic risks might be contained.  “Unsecured credit will more quickly turn down if stressed, since they are given to (often) lower-income households and with no security. But for those reasons, they are less likely to lead to systemic problems,” explains Bezemer.

Though he believes the unlikely challenge could come from mortgages, where the trends last longer and grow bigger owing to larger loan sizes, higher-income borrowers, and the presence of collateral, which collectively make them seem less risky. “Yet they are connected to assets whose values increase with greater lending, pulling in even more funds,” says Bezemer. According to the RBI, the share of home loans with loan-to-value (LTV) ratios exceeding 70% is on the rise, indicating growing leverage. While home loans make up for 29% of overall household debt (as of March 2025), the growth is coming on back of existing borrowers either availing top-up or additional home loans. 

In contrast, consumer debt lacks this reinforcing cycle, causing mortgage booms to escalate quicker and appear safer, as LTVs remain steady, right up until they collapse. Overall, this dynamic pose greater hazards. "Mortgage booms grow faster and feel more secure since LTVs do not fall – until they fall. This is a more dangerous dynamic," says Bezemer.

According to the Economic Survey (FY26), home loan market has tripled in value over the past decade to Rs 37 lakh crore, accounting for 11% of India’s GDP.

While Bezemer does not predict a full “balance-sheet recession” without India-specific analysis, he cautions: “Certainly the financial structure moves towards instability, and not away from it.” Post-Covid corporate deleveraging—firms favoring internal funds over bank loans enhances corporate stability but exposes banks to volatile household credit. Overall credit growth remains strong at 14.6% year-on-year in the January 31, 2026 fortnight, with projections around 16.5% for 2026, but weak business demand could pose macro-financial concerns as productive credit lags.

“Corporate deleveraging in and of itself makes for more financial stability in the corporate sector. But bank portfolios may be growing more vulnerable by relying less on (more stable business credit). The balance of these two (de) stabilising trends is what matters,” says Bezemer.

Policy revival, however, could mitigate risks, opines Bezemer. "Yes, it could," he says on reintroducing targeted industrial credit to channel funds to innovation and green initiatives.

As India shifts toward markets and alternatives such as equity funding, new stability challenges emerge for banks. Yet, with evidence-based tweaks, avoidance of Western pitfalls is possible. Bezemer observes that Indian banks must indeed confront the challenge posed by equity markets and alternative funding sources to conventional bank lending, especially in the industrial sector. He notes that India has transitioned away from its historically dominant bank-centric financial system—though his 2021 paper focuses exclusively on banking dynamics. “But this shift to markets introduces new stability concerns,” warns the economist.

For now, India’s banking system, with gross non-performing assets close to its historical low of 2.3% as of March 2025, is sitting pretty. But then subtle shifts warrant vigilant monitoring.