Clipped from: https://www.thehindubusinessline.com/opinion/perils-of-easy-credit-access/article70267998.ece
It is up to the borrowers to exercise caution
Credit: Easy access can be a bane | Photo Credit: William_Potter
Banks and Non-Bank Financial Companies (NBFCs), including Fintech digital lenders, are actively offering consumer loans. Banks began granting consumer loans around 2000, but the pace increased after 2010 when demographic shifts raised the standards of lifestyle for young borrowers. The desire for homeownership, multiple cars, modern furnishings, and modular interiors, along with a passion for overseas travel, has boosted the appetite for borrowing.
Lenders provide consumer loans to individuals, offering liquidity and affordable credit for a wide range of personal and family-related expenditures, thereby enhancing consumer buying power and lifestyle.
They could include (i) home loans backed by the property purchased, (ii) auto loans, education loans—partly secured, and (iii) unsecured personal loans, overdrafts and credit cards used for weddings, social events, home appliances, travel and vacations, medical expenses, buy now and pay later schemes, auto loans converted into EMIs, payday advances, and many emergency needs.
Because the credit risk in unsecured loans may be higher, they often carry higher interest rates and require better borrower credit scores for approval, due to the increased default risks.
Easy access to consumer loans is used as a cross-selling strategy to retain the growing number of financially savvy borrowers with stable incomes and regular repayment capacity. They have PAN cards to track their credit history, and lenders rely solely on the borrower’s creditworthiness and ability to repay, without relying on any assets in case of default. The risk-based interest premium is added to cover the increased credit risk.
Trends of consumer loans
With a growing appetite to borrow, the outstanding consumer loans increased from ₹49.34 trillion in September 2023 to ₹62.54 trillion in September 2025, accounting for nearly 33 per cent of the total bank credit of ₹188.57 trillion as of March 2025. Excluding home loans, outstanding consumer loans grew from ₹23 trillion to ₹30 trillion during this period.
Due to increased vulnerability to credit risk from unsecured personal loans and credit card dues, the RBI increased its risk weight from 100 to 125 in November 2023. This change impacts capital adequacy and the risk-based pricing for this segment of unsecured loans. Consumer loans, excluding home loans, account for approximately 54.9 per cent of household debt as of March 2025. Unsecured loans, such as credit cards, consumer durables, and personal loans, continue to expand despite higher risk weights.
RBI data and industry reports indicate that consumer loan borrowers comprise approximately 34-37 per cent of all bank borrowers, out of a total borrower base of around 32 crore. Non-bank lenders such as NBFCs and FinTech platforms have significantly increased access to consumer credit, with over 10 crore personal loans issued through digital platforms and NBFCs in FY 2024-25.
Seamless access:
The proliferation of consumer loan schemes promoted through digital marketing, print, and electronic media is enticing potential borrowers to take loans even through digital apps. Many lenders offer consumer loans as an added feature to attract salary account holders, aiming to increase savings deposits and create opportunities to cross-sell other fee-based wealth management products.
There are roughly 1,500 RBI-approved digital lending apps offering turnaround times as short as same-day disbursement. These hassle-free credit options allow some borrowers to access unsecured loans from multiple banks and hold numerous credit cards. Some even transfer balances between lenders to avoid default. Over time, they can fall into a debt trap by rolling over credit card dues and paying high interest rates.
A network of four Credit Information Companies (CICs)—TransUnion, CRISIL, Equifax India, Experian India, and CRIF High Mark—provides credit histories and ratings of potential borrowers by linking them to PAN numbers. Lenders rely on these ratings to assess an individual’s creditworthiness and determine risk-based pricing for consumer loans, utilizing a lending automation software system that incorporates built-in algorithms.
Lenders report borrowers’ credit behavior—the amount borrowed and the timeliness of repayment, as well as any overdues—to CICs every fortnight to keep each borrower’s credit history updated.
Credit discipline
In a rapidly changing socio-economic and demographic landscape, lifestyle needs tend to be limitless. Banks and non-banks innovate lending products, including consumer loans, with multiple goals – expanding the customer base, strengthening relationships, and increasing risk-based yields on these products with a focus on growth and profitability.
Lenders are large institutions focused on the overall profitability of their consumer loan portfolios. It is the borrower’s responsibility to strike a balance between steady income flows and maintaining a proportionate, sustainable loan repayment commitment to avoid falling into a debt trap.
The availability of tempting consumer loans with just a phone tap can sometimes threaten borrowers’ long-term financial health, potentially damaging their credit history to the point where they may become ineligible for future credit.
Building a good Credit history is an important virtue to remain creditworthy. This could have broader implications with interoperable technology, where even potential employers can access an applicant’s credit history to assess their credit discipline and general prudence.
Lenders offer consumer loan products as part of their business; however, it is up to borrowers to decide whether such a loan is essential and affordable in the long term, and how their lifestyle needs fit with their changing financial situation. How to contain financial needs with income streams.
Product innovation in the consumer loan segment for lenders can be a significant business advantage, enabling them to adjust pricing and product features to better align with targeted risk-adjusted returns. For many lenders, the consumer loan segment could be a boon. However, whether it becomes a boon or a bane depends on how borrowers view the risk of borrowing and how they maintain credit discipline. In the evolving consumer loan ecosystem, the responsibility for credit discipline increasingly shifts towards borrowers.
The writer is an Adjunct Professor at the Institute of Insurance and Risk Management in Hyderabad. Views are personal
Published on November 12, 2025
aniltikotekar4sme.com 