Are Indian banks underestimating the unsecured loan problem?

In today’s episode on 1st April 2026, we look at whether India’s easy credit boom is starting to show cracks. Sign up for FREE insurance masterclass by Ditto https://ditto.sh/2cgegs

• 0:00Speaker 00

  Hello folks, you're tuned into Finshots Daily. In today's episode, we look at whether India's easy credit boom is starting to show cracks.

• 0:11Speaker 00

  And also, here's a quick side note before we begin. This weekend, we're hosting a free two-day insurance masterclass that helps you build real financial security by understanding both health and term life insurance the right way. If you'd like to book your free seat, then you can do so by heading to the link in the description and registering. Alright, let's get on to today's story. A few years ago, getting a loan meant paperwork approvals and waiting. But today, it only takes a few minutes. A credit card getting approved instantly, personal loans are issued with a few taps and buy now, pay later options are almost everywhere. Access to credit has never been easier than now. And in a way, it's a good thing. More access to credit means more consumption, more spending and ultimately, more growth for the economy.

• 0:56Speaker 00

  It also brings first-time borrowers into the formal financial system, away from informal money lenders. Ultimately, this gives people the flexibility to manage short-term needs without dipping into savings. Banks and NBFCs have also actively pushed these products because they are high-margin, require no collateral and scale easily through digital channels. Let's take credit cards, for instance. The number of cards approved has been steadily increasing over the last few years. From FY12 to FY25, the number of active credit cards surged almost 5x and by the end of December 2024, there were over 100 million active credit cards in India. And this is just the credit cards, by the way. People have other kinds of loans as well. So, as the saying goes, too much of a good thing can also be a bad thing.

• 1:39Speaker 00

  Because when credit becomes this easy to access, it also becomes easy to overuse. And when millions of borrowers start taking on small loans at the same time, the risks don't show up immediately, they build up slowly in the background. And that's exactly what makes the current situation worth paying attention to. The RBI has already flagged this trend. It has tightened norms by increasing risk weights on unsecured loans, meaning banks have to set aside more capital for every rupee they lend. Yet, despite these signals, credit growth in the segment has continued, which raises a natural question. Why are lenders still dispersing more loans? To understand that, it helps to look at how credit cycles typically unfold. In the early stages of credit cycle, everything appears stable. Lending grows quickly, defaults remain low and repayment behaviours look strong.

• 2:24Speaker 00

  This creates confidence within the systems and banks expand further. In this stage, new borrowers enter the market and credit becomes easier to access. But as we mentioned earlier, risks in unsecured lending tend to build slowly. The true risk emerges eighteen to thirty-six months after the loan is dispersed. Credit card NPAs, that is non-performing assets, which is essentially where cardholders have failed to make interest or principal repayments, have jumped by about seven point three percent in FI twenty-two and another twenty-eight percent in FI twenty-four. And what this indicates is that loans originated two to three years ago are now cracking under stress. This is because unlike secured loans, there is no asset backing these loans.

• 3:04Speaker 00

  Repayment depends entirely on borrowers' income and when credit grows too fast, especially among first-time borrowers, risks slowly begin to build in the background. So when that stress starts to emerge, it often does so quickly because multiple borrowers begin to struggle at the same time. There are early signs of that stress beginning to show now. Retail lending, once considered one of the safest segments of banking, is now under pressure at the margins. Many first-time borrowers are managing multiple loans, often across different lenders. At the same time, banks themselves are facing changing conditions. Deposit costs have been rising, which compresses margin, regulatory scrutiny has increased, growth while still strong is becoming more expensive to sustain. Several banks have begun tightening their approach to unsecured lending following the RBI's warning.

• 3:49Speaker 00

  Credit card issuers, for instance, are recalibrating their customer base. Rewards are being reduced, fees are being adjusted and low-value or high-risk users are being gradually discouraged. The focus is shifting toward retaining high-spending, low-risk customers who are more profitable and less likely to default. A similar shift can be seen in areas other than credit cards too. Take IDFC First Bank as an example. The bank is aggressively de-growing its microfinance portfolio, that is MFI portfolio, with its share of the total loan book falling from Six point six percent in March twenty twenty four to two point four percent by December twenty twenty five. One can argue that this withdrawal is a response to the over indebtedness of rising NPAs seen across the MFI sector in late twenty twenty four.

• 4:34Speaker 00

  These kinds of withdrawals suggest that lenders are not ignoring the risks, which is a good sign. However, the central tension is still unchanged. Banks continue to bet that strong economic growth will support repayments. And as long as incomes rise and employment remains stable, borrowers can continue servicing their loans. But if income growth does not keep pace with borrowing, or if households stretch themselves too thin, stress can build quickly. But once a borrower defaults, recovery rates tend to be lower compared to secured loans. And that makes the system more sensitive to changes in borrower behavior. The concern, therefore, is not about immediate crisis. India's banking system today is far more resilient than it was in the past. Banks NPAs have declined from the earlier peaks.

• 5:16Speaker 00

  They hold better capital buffers and regulatory oversight is stronger. But the nature of risk is also evolving. Instead of large corporate defaults, the next phase of stress could be driven by small household loans. If defaults start rising, lenders may respond by tightening credit further. And since much of today's spending depends on easy credit, this could slow consumption. So what begins as a financial sector adjustment can spill over into the broader economy. So how can you, as a retail customer, come out ahead in this potential crisis? First, treat easy credit like a trap, not a privilege. Just because your limit increases or a new card is instantly approved doesn't mean you should use it. Use it only if you need it. Banks expanded their loan book aggressively when money was cheap.

• 5:58Speaker 00

  Now that they're tightening, you don't want to be caught over leveraged when tight turns. Second, optimize for benefits while they still exist. If banks are cutting rewards and increasing fees, the smartest move is to actively evaluate your cards and accounts. Keep the ones that give you real value and don't use the ones that don't. Third, protect your credit profile. As banks become more selective, high-quality borrowers will get better terms while everyone else gets priced out. Paying on time, keeping utilization low and avoiding unnecessary loans will ensure you stay in the profitable customer bucket. And finally, build your own safety net. If banks are preparing for potential slowdown, maybe you should too. A solid emergency fund and lower dependence on credit can give you flexibility when lending tightens or costs rise.

• 6:42Speaker 00

  Because in every credit cycle, the winners aren't the ones who borrow the most, they're the ones who borrow only when they need to. All right, folks, I will see you in the next one. Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected]. Until next time.