In today’s Finshots, we take a look at how India’s soft credit interest rate is starting to show its wings.
Also, here are some side words before we begin. This weekend, we are holding a free 2-day Insurance Masterclass that helps you build true financial security by understanding health and life insurance the right way.
📅 Saturday, April 4 to 11:00 AM: Life Insurance
How to protect your family, choose the right amount of cover, and understand what is really important during the application.
📅 Sunday, April 5th to 11:00 AM: Life Insurance
How hospitals handle claims, common deductibles, common mistakes consumers make, and how to choose a plan that won’t let you down when you need it most.
👉🏽 Click here to register while seats are available.
Now, on to today’s story.
Story
A few years ago, getting a loan meant paperwork, approvals and waiting. But today, it only takes a few minutes. Credit cards are accepted instantly, personal loans are granted in a few taps, and buy now, pay later options are everywhere. Getting credit has never been easier than it is now.
And in a way, that’s a good thing. More access to credit means more consumption, more spending, and ultimately, economic growth. It also brings first-time borrowers into the formal financial system, away from informal lenders. Ultimately, this allows people to manage short-term needs without putting money into savings.
Banks and NBFCs have also actively pushed these products because they are highly liquid, collateral-free and easily scalable through digital channels.
Let’s take credit cards, for example: the number of accepted cards has been steadily increasing over the past few years. From FY12 to FY25, the number of active credit cards increased 5xand by the end of December 2024, they were gone 100 million credit cards that work in India.
And these are just credit cards. People have other types of loans, too. So, as the saying goes, too much of a good thing can also be a bad thing. Because when credit is easy to access, it is also easy to overuse it. And when millions of borrowers start taking out small loans at once, the risks don’t appear immediately. They build slowly in the background. And that’s exactly what makes the current situation worth paying attention to.
The Reserve Bank of India has already marked this trend. It tightened norms by increasing the risk weight on unsecured loans, meaning banks have to set aside more capital for every rupee they lend. However despite these signs, credit growth in this sector has continued.
Which raises the natural question: Why are lenders giving out more loans?
To understand that, it’s helpful to look at how mortgages work.
In the early stages of the loan cycle, everything seems stable. Lending is growing fast, rates are staying low, and the payment system looks strong. This creates confidence in the system, and banks expand further. During this period, new borrowers enter the market, and credit becomes easier to obtain.
But, as we mentioned earlier, the risks of unsecured loans tend to grow slowly. The real risk occurs 18 to 36 months after the loan is issued. Credit card NPAs (non-performing assets) – where cardholders have failed to make interest or principal payments – have gone from over 73% in FY22 and another 28% in FY24. And what this indicates is that loans that originated 2-3 years ago are already collapsing under stress.
This is because, unlike secured loans, there is no asset backing these loans. Repayment depends entirely on the borrower’s income. And as credit grows rapidly, especially among first-time borrowers, risks begin to spread slowly behind.
So, when that pressure begins to appear, it usually does so quickly, because many borrowers begin to struggle at the same time. (* sofa bed *2008 *cough*)
There are early signs that depression is starting to show.
Retail lending, once considered one of the safest areas of banking, is now under marginal pressure. Many first time borrowers manage many loansoften across different lenders.
At the same time, banks themselves are facing changing conditions. Deposit costs are rising, which is putting pressure on investors. Regulatory scrutiny has increased. Growth, while strong, is becoming more expensive to maintain.
Several banks have started tightening their unsecured lending practices following the RBI warning. Credit card issuers, for example, are improving their customer experience. Earnings are being cut, fees are being adjusted, and low-quality or high-risk users are slowly being discouraged. The goal is to retain high-spending, low-risk customers with high profitability and low probability of default.
A similar shift can be seen in areas other than credit cards, too. Take IDFC Bank Bank as an example. The bank is aggressively expanding its microfinance (MFI) portfolio, and its share of the total loan book is declining 6.6% in March 2024 at 2.4% in December 2025. One could argue that the withdrawal is a response to “excessive debt” and increasing NPAs seen across the MFI sector by the end of 2024.
These types of withdrawals suggest that borrowers are risk-averse, which is a good sign.
However, the central tension remains unchanged – Banks continue to bet that strong economic growth will support the recovery. And as long as wages rise and employment remains stable, borrowers can continue to service their loans. But if income growth does not keep pace with borrowing, or if families are stretched too thin, stress can grow quickly.
But once the borrower defaults, the repayment rates are relatively low compared to secured loans. And that makes the system more sensitive to changes in borrower behavior.
Therefore, the concern is not about the current crisis. The banking system in India today is more robust than it was in the past. NPAs of banks they have shrunk from their earlier peaks, they have better financials, and regulatory oversight is stronger. But the nature of the risk is also changing. Instead of major corporate failures, the next phase of stress can be driven by small family loans.
If delinquencies begin to rise, lenders may respond by foreclosing the loan further. And since most of today’s consumption depends on easy credit, this can reduce spending. Thus, what begins as a reform of the financial sector can spill over into the wider economy.
So, how can you, as a retail customer, move forward in these potential problems?
First, treat soft credit as a bait, not a privilege. Just because your limit increases or a new card is approved right away doesn’t mean you should use it. Use it only when you need it. Banks expanded their loan book aggressively when money was cheap. Now that they are tightening, you don’t want to get too caught up when the tide turns.
Second, improve the benefits while they are available. If banks are cutting rewards and increasing fees, the smartest move is to actively monitor 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 standing. The more selective banks are, the better quality borrowers will get, while everyone gets deals. Paying on time, keeping spending low, and avoiding unnecessary loans will ensure you stay in the “profitable customer” bucket.
And finally, create your own safety net. If banks are bracing for a possible downturn, maybe you should too. A solid emergency fund and low reliance on credit can give you flexibility when loans tighten or costs rise.
Because in every credit cycle, the winners are not the biggest borrowers. They are the only borrowers when necessary.
Until then…
If you liked this Indian story of money lending and the dangers behind it, share it with friends, family or strangers WhatsApp, LinkedIn or X.
Also, if you are someone who likes to keep an eye on the world of business and finance, hit subscribe if you haven’t already. And if you’re already subscribed, thank you! Maybe forward this to someone who might enjoy our stories but hasn’t found us yet.
#Indian #banks #underestimating #problem #unsecured #loans