The Reserve Bank of India has identified growing concerns within the booming private credit market, according to the central bank's latest Financial Stability Report. The RBI's latest report highlights an uptick in defaults and investor redemption requests, signaling emerging stress in the financial system. While not currently a systemic threat, the central bank emphasizes the critical need for ongoing monitoring to safeguard the broader financial system from potential risks. The RBI's latest financial stability report indicates that Indian banks will likely keep capital levels above the regulatory minimum, even in challenging scenarios, with core capital ratios expected to remain healthy despite some reduction. In its June Financial Stability Report, the RBI noted that private credit, a form of non-bank financial intermediation, has grown significantly in recent years, with estimates placing the market size between USD 1.5 trillion and USD 2 trillion, though the exact size varies due to differing definitions across jurisdictions and data limitations.
Corporate debt-servicing capacity improved significantly in Q4 FY26, with the interest coverage ratio (ICR) climbing to 6.5, marking the highest level in the last two financial years. According to the RBI's latest Financial Stability Report, this improvement was driven by a stronger sequential increase in gross profits relative to interest expenses. However, the central bank has flagged emerging pockets of stress, with the proportion of companies with an ICR below one (considered vulnerable) rising to 18.5% in Q4 FY26. Companies with an ICR above four (financially stronger) accounted for 55.2% of the total, while firms with an ICR between two and four made up 15.7%. Despite the increase in vulnerable firms, the RBI noted that the overall debt-service burden remained comfortable, with the debt service ratio (DSR) of listed private corporates at 11.7% in September 2025, below the long-term average of 12.2%. The private non-financial corporate sector maintained robust performance in Q4 FY26, supported by higher sales growth and stable operating margins, as per the latest RBI report.
The household sector's debt as a share of GDP reached 45.5% in September 2025, according to the Reserve Bank of India's latest Financial Stability Report. This represents a significant increase from the sector's five-year average of 42.9% and marks the first time household debt has exceeded this long-term benchmark since September 2023. The increase was primarily driven by rising non-housing retail loans, which constituted 58.4% of total borrowings as of March 2026. As per the RBI's latest report, household debt continued its upward trajectory in 2025-26, rising to 45.5% of GDP at the end of September from 41.3% at the end of FY25. Among emerging market economies, India stands fourth after China (third position with household debt of 59% of GDP), Malaysia (69.9%), and Thailand (87.3%), according to the RBI report. In terms of broad categories, consumption-related loans account for nearly half of total household borrowings, followed by loans for productive purposes, with borrowing for asset creation expanding at a relatively slower pace.
Despite the rise in household borrowings, borrower profiles have continued to improve across both consumption and productive loans, as reported by the RBI. The share of higher-rated borrowers (prime and above) has increased in terms of both outstanding amounts and the number of borrowers. This improvement is evident across both consumption and productive loans, with a growing share of prime and above borrowers in total outstanding credit. The central bank noted that non-performing housing loans remain low for banks, declining from 1.2% in March 2019 to 0.5% in March 2026. The notable shift in banks' housing loan portfolios shows that previously, outstanding loans below the ₹25 lakh credit limit dominated (60.6% of total housing loan outstanding as of March 2014), reflecting a focus on affordable housing. However, loan distribution has moved toward higher-value segments, with the share of ₹50 lakh and above credit limits now accounting for 44.7% of outstanding loans.
Fintech lenders now dominate India's small personal loan market, holding over half of loans under ₹50,000 by March 2026, according to latest market data. However, this rapid expansion comes with rising delinquencies, reaching 6.4% for fintechs, significantly higher than banks and NBFCs. A large portion of these loans are unsecured and target younger borrowers, signaling increased risk in this fast-growing segment. The government has provided substantial credit guarantees, totaling ₹13 lakh crore to micro and small enterprises, significantly boosting credit inflow to the sector.
Experts have consistently flagged concerns about the increasing household debt, pointing out that an increased quantum of resources is going towards consumption expenses for servicing loans for depreciating assets like vehicles. The sustained elevation of household debt above its five-year average since September 2023 reflects the growing reliance on borrowing for consumption purposes across the Indian economy. The RBI's latest report highlights that it is difficult to identify and assess the interlinkages between entities in the private credit ecosystem due to the opacity of these markets and the presence of multiple participants with varying levels of leverage. Among emerging market economies, India's household debt level is higher than that of Chile (44.1%), Brazil (36.7%), and South Africa (33.6%), but is lower than countries like Thailand (87.3%), Malaysia (69.9%), and China (59%).
