Yet this progress masks two deep and related failures: a poorly functioning home loan market and a fragile retirement savings system.
A glance at household balance sheets reveals the cracks. Wealth, especially among richer households, is excessively concentrated in real estate. Reliance on unsecured debt is high. Retirement savings are minimal, reflecting continued dependence on family support in old age.
Fixing these issues is of first-order importance for household welfare, with powerful spillovers for the stability and efficiency of India’s financial system.
Property-heavy portfolios
Indian households hold an unusually large share of their wealth in real estate—far more than households in comparable economies—while participation in home loan markets remains strikingly low. This excessive accumulation of home equity often crowds out investment in other long-term assets, such as retirement savings, directly linking the two problems.
In well-functioning financial systems, mortgage borrowing allows households to smooth housing consumption over their working lives by aligning repayments with income. In India, by contrast, housing is often financed through personal savings, informal borrowing, short-term loans, and family transfers.
This patchwork financing is slow to assemble, delaying home ownership for young families and imposing onerous social obligations. Formal mortgage markets should be the solution. Instead, they remain underdeveloped.
Why mortgages fail
The reasons are structural and practical. On the structural side lie weaknesses in the infrastructure needed for long-term, high-ticket lending: slow legal enforcement, unclear land titles, and uncertain property rights.
On the practical side is the sheer hassle of taking a home loan. Migraine-inducing documentation, repeated verification, endless wet signatures, aggressively pushed loan insurance, confusing tenor choices, opaque pricing, frequent repricing, and high frictions in refinancing all deter borrowers.
The outcome is predictable. Many households avoid mortgages altogether; others take loans poorly matched to their needs. The system encourages over-investment in property financed through illiquid and risky means—locking wealth into a single asset while leaving households dangerously unprepared for retirement.
An ageing reality
The second failure—retirement savings—is equally consequential. India is ageing. Joint families are giving way to nuclear households. Life expectancy is rising. Yet pension wealth remains negligible.
Participation in formal retirement accounts is low, contributions are modest, and balances are inadequate to sustain the living standards households grow accustomed to during their working years.
Many families assume that children, property, or both will provide old-age security. This may have worked in the past, but it is increasingly fragile in an urbanized, mobile economy. Housing wealth is difficult to monetize in retirement, while family support is uncertain—especially as younger generations face mounting economic pressures.
This is not simply a failure of foresight or thrift. Retirement planning is cognitively demanding and emotionally distant. The benefits lie decades away, risks are abstract, and products are complex. Without strong defaults and simple designs, households freeze—and inaction leads to chronic under-saving.
Market forces have not helped. High-commission products, opaque fees, and confusing guarantees erode trust and deepen inertia.
What unites the mortgage and pension failures is a deeper lesson: competition does not automatically fix personal finance markets when households are prone to error.
Competition pushes firms to sell what households want, not what they need. Those least equipped to evaluate complex products often end up subsidising savvier consumers who can see through the fine print.
Fixing mortgages
What would reform look like?
In housing finance, the goal should be boring, standardized mortgages. Simple fixed-rate loans—or transparently benchmarked floating-rate loans—that automatically refinance when interest rates fall. Total rupee costs should be clearly disclosed upfront. Disbursement should be fast and frictionless, leveraging India’s exceptional digital infrastructure.
A regulator-mandated standard default product, required to be offered by all lenders and easy to compare, would dramatically improve outcomes for borrowers.
For retirement, the ideal is a single, portable pension account that follows workers across jobs. Automatic enrolment should begin at the first instance of formal employment, paired with sensible life-cycle investment defaults.
The Universal Account Number is a promising start, but much more can be done. Complexity must be stripped away, costs minimised, and active choices encouraged where they add value.
In both housing and retirement markets, conflicts of interest must be tackled head-on. Advice and distribution should be clearly separated. Commissions must be disclosed plainly. Mis-selling should be punished visibly and consistently.
India has already shown it can build world-class financial infrastructure. The harder task is fixing the financial products that matter most for household security.
Getting these two big things right would give Indian families something far more valuable than better balance sheets: confidence that the financial system works for them, not against them.
Tarun Ramadorai, professor of Financial Economics, London School of Economics and author of Fixed: Why Personal Finance is Broken and How to Make it Work for Everyone.
