Detecting Over-Indebtedness While Monitoring Credit Markets in India

Unlike several jurisdictions, especially in Europe, India does not have a clear definition of over-indebtedness (OI). The distress undergone by households in the repayment of their loans often remains undetected due to the measures that households take, ranging from mild coping mechanisms, such as borrowing from family, acquaintances and informal lenders or temporarily cutting down on expenses, to extreme coping mechanisms, such as skipping meals or discontinuing their children’s education, in order to repay on time. Such households who continually struggle to repay, though not necessarily default, must also be considered over-indebted. Long-drawn, geographically concentrated OI may develop into systemic risk and political unrest, adversely affecting the credit markets from developing in an orderly manner and inhibiting growth in the real economy.

This publication calls for designing more effective and tailored policies to combat OI by developing Reserve Bank of India's (RBI's) supervisory capacity to monitor credit markets and prevent OI. Once adopted, the improved supervisory capacity of the RBI is expected to play a pivotal role in helping the RBI discharge its mandate towards financial stability and customer protection.