'Affordable today, distress tomorrow': ISB professor's warning for Indian home loan borrowers

India’s growing household debt is raising concerns over how much interest-rate risk is being transferred to borrowers, particularly through floating-rate loans.

Prasanna Tantri, Associate Professor of Finance at the Indian School of Business (ISB), has highlighted the issue while comparing India's housing finance model with that of the US.

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RBI FSR flags rise in household debt

According to the RBI's Financial Stability Report in June this year, household-sector debt reached 45.5% of GDP by September 2025, up from 41.3% at the end of March 2025. The level had remained above the five-year average of 42.9% of GDP since September 2023.

The RBI said the increase was driven primarily by non-housing retail loans, which accounted for 58.4% of total household borrowings as of March 2026. Consumption-related loans made up nearly half of household borrowings, followed by productive-purpose loans, while borrowing for asset creation expanded at a relatively slower pace.

At the same time, the central bank said borrower profiles have improved, with the share of prime and above-rated borrowers rising in both outstanding credit and borrower numbers.

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ISB professor warns about floating-rate risk

Tantri said the structure of Indian lending means households bear a larger share of interest-rate risk than borrowers in some advanced economies and it is the time to end it.

"In India, home loans are predominantly floating-rate, transferring interest-rate risk to households. Borrowers access affordability using today’s EMI without fully internalising 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 cautioned that borrowers often fail to consider a future increase in EMIs. “The problem is borrowers don't price in the possibility that EMIs can go up later; this creates distress when they go up. When interest rates are low, every loan we give is like a teaser loan.”

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Why the US model is different

Tantri contrasted India with the US, where fixed-rate mortgages dominate the housing market. The Federal Reserve Bank of New York has noted that fixed-rate mortgages dominate the US mortgage market, while the Dallas Fed says most US residential mortgages have 30-year fixed-rate terms.

This means an existing US homeowner with a fixed-rate mortgage generally does not see their monthly principal-and-interest payment rise simply because the Federal Reserve raises rates. The interest-rate and refinancing risks are instead absorbed elsewhere in the mortgage-finance system.