Indian households tend to borrow later in life and are more likely to reach retirement age with positive debt balances, which is a source of risk given that they are no longer earning income during these years, a report of the Household Finance Committee observed.
The committee was formed following discussions at the Financial Stability and Development Council headed by Tarun Ramadorai, professor of financial economics, Imperial college London. It had representation from all the financial sector regulators.
“Despite the high holdings of real estate, mortgage penetration is low early in life, and subsequently rises as households age. This is also at variance with Indian households’ counterparts in other countries,” the report said.
The report further notes that the Indian household finance landscape is distinctive through the near total absence of pension wealth. “Pension accounts and investment-linked life insurance products exist, but they are only used frequently by households located in a small group of states, while in most other states, the contribution of pensions wealth to household wealth is negligible,” it said.
Unsecured debt
The report observes high levels of unsecured debt, taken mostly from non-institutional sources such as moneylenders. As such debt generates high costs for Indian households, it is likely to lead to households becoming trapped in a long cycle of interest repayments, it said.
The report notes a large fraction of the wealth of Indian households is in the form of physical assets — in particular, gold and real estate. But, it said they can benefit greatly by re-allocating assets towards financial markets and away from gold.