FEBRUARY 2025

India’s personal loan market is witnessing a significant shift, with a growing reliance on unsecured loans such as credit card debts and personal loans. This trend is exacerbated by the banking sector’s aggressive push toward a consumption-driven economy.

But while easy access to credit can fuel economic growth, it also raises concerns about financial stability.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

One of India’s largest banks, ICICI Bank, has retail loans amounting to ₹7 lakh crore, out of which 17%—approximately ₹1.2 lakh crore—are unsecured loans. 

This signals a changing banking strategy, where financial institutions are increasingly prioritizing consumer credit.

However, not all is well in this expanding credit market.

• Crisis of Confidence: India Sliding 

• Why Adani is Safe?

• R&D: The Missing Pillar in India’s Global Ambition 

The Fitch Rating has expressed concerns about asset quality, highlighting a worrying sign for the financial health of the sector.

Alarmingly, reports suggest that 52% of retail personal loans are turning into bad loans, raising critical questions about the sustainability of this borrowing model.

This raises critical questions about the sustainability of this borrowing model and whether India is headed toward a financial crisis if corrective measures are not taken.

India has traditionally been a savings-oriented society.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

However, over the past few decades, the government and financial institutions have actively encouraged consumer credit as a tool for economic expansion.

The proliferation of credit cards and personal loans has led to a fundamental shift in the way younger generations manage their finances, increasingly relying on debt to sustain their lifestyles.

This transformation aligns with a broader global trend where economies move from savings-based models to consumption-driven ones.

“

...reports suggest that 52% of retail personal loans are turning into bad loans...

However, such a shift is not without consequences. While credit-driven growth can boost short-term economic activity, it also comes with long-term risks. 

It is not unknown that  the Western model of debt-driven economies has often resulted in financial crises, as evident in several global economic downturns.

The Indian banking system must tread carefully to avoid similar pitfalls.

• Corruption Index: India's Alarming Fall  

• Government and Corporates – Holy and Unholy Partnership 

• Regulatory Capture - Government, Corporate and Democracy 

History offers numerous examples of financial crises aggravated by over-reliance on personal loans.

The 2008 Global Financial Crisis was largely fueled by easy credit and excessive borrowing, leading to the collapse of banks and financial ruin for millions, in US and around the globe.

The 1997-98 Asian Financial Crisis saw excessive foreign and domestic borrowing result in economic downturns and currency devaluations. 

Similarly, Greece’s Sovereign Debt Crisis (2010-12) and Argentina’s Economic Crisis (2001) were worsened  by high external debt and personal borrowing, leading to prolonged economic instability.

India must take these lessons seriously, as the current surge in unsecured personal loans could pose a systemic risk if left unchecked.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

Despite these warnings, the Indian banking system continues to push unsecured lending.

Traditionally, Indian society has discouraged taking personal loans and relying on credit cards. A strong savings ethic has been ingrained in Indian households, making them prefer saving over borrowing unless absolutely necessary.

“

The 2008 Global Financial Crisis was largely fueled by easy credit and excessive borrowing...

Unlike in Western nations where credit is a norm, Indian consumers remain wary of loans due to fears of default and financial distress.

Debt also carries social stigma in India, where it is often perceived as a sign of financial mismanagement.

Additionally, high-interest rates on credit cards and personal loans further deter many from opting for unsecured debt, making them a less attractive financial option.

However, several indicators highlight the fragility of the current lending landscape. Declining loan repayment rates suggest that borrowers may not have the capacity to repay their debts.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

The slowdown in secured loan growth—where home loans, auto loans, and loans against property have seen a decline—points to a possible reduction in overall borrowing confidence.

This declining confidence is further evident in the personal loan sector, where growth has slowed dramatically.

Personal loan growth, which was at 36% in mid-2023, has now dropped to just 3% in mid-2024, indicating a significant loss of momentum.

The number of new-to-credit consumers has also hit record lows, with the share of first-time borrowers falling from 16% to 12% over the past year. 

“

...banks are now focusing on salaried individuals with stable incomes and high credit scores for unsecured loans

These trends indicate a cautious consumer base, possibly signaling the onset of financial stress.

In response to rising defaults, banks are now focusing on salaried individuals with stable incomes and high credit scores for unsecured loans. While this strategy appears rational from a risk-management perspective, it raises ethical concerns.

By disproportionately targeting salaried professionals, banks could be pushing a specific section of society into economic vulnerability.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

Middle-class earners, who often have limited savings and financial buffers, may find themselves trapped in a cycle of debt. 

This approach risks creating a two-tiered economic structure where financial burdens disproportionately fall on a single segment of the population while wealthier individuals remain insulated from such risks.

• Is India’s Economic Ladder on a Wrong Wall? - Part I 

• Is India’s Economic Ladder on a Wrong Wall? - Part II 

• 3 Killer Diseases in Indian Banking System 

The issue of rising financial inequality further complicates the scenario.

A recent study by the World Inequality Lab has highlighted the extreme income and wealth disparity in India. The income inequality is similar to British Colonial times in India.

With the top 1% of Indians holding 22.6% of the country’s income and 40.1% of its total wealth, the gap between the rich and the poor is wider than ever.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

This inequality is worsened by economic policies that favor credit-fueled consumption, disproportionately affecting middle-class and lower-income groups.

The billionaire class in India has seen a meteoric rise, with 94 new billionaires added in 2023 alone. Meanwhile, the common citizen faces increasing financial stress due to rising debt burdens.

If this trajectory continues, India risks replicating the economic disparities seen in highly unequal societies like the U.S. and Brazil. 

“

The income inequality is similar to British Colonial times in India

To prevent an impending financial crisis, policymakers and financial regulators must take proactive steps.

The RBI should impose tighter norms on unsecured lending to prevent reckless credit expansion. Financial literacy programs must be implemented to educate consumers about responsible borrowing and debt management.

Instead of an aggressive push towards a consumption-driven economy, the government should focus on policies that promote sustainable economic growth.

Wealth redistribution measures such as progressive taxation and social welfare programs can help bridge the widening economic gap. 

Encouraging alternative investment avenues and promoting investment in productive assets rather than excessive debt can create a more resilient economy.

“

The warnings from Fitch Rating serve as red flags that must not be ignored

While personal loans and credit-based consumption can fuel short-term economic growth, an unchecked reliance on unsecured debt could lead to long-term financial instability.

The warnings from Fitch Rating serve as red flags that must not be ignored.

• गुल्लक से पर्सनल लोन तक: क्या भारत अपनी वित्तीय आत्मा खो रहा है? 

Policymakers, financial institutions, and consumers alike must work together to ensure that India’s economic progress is not built on a fragile foundation of unsustainable debt and consumerism. 

The goal should be to strike a balance between economic expansion and financial prudence—ensuring that growth does not come at the risk and cost of financial ruin for millions of Indians.

Indians need to look back to their ancient roots to imbibe financial prudence, because India is not Europe and never the twain shall meet.