Deteriorating macroeconomic conditions and increasing household debt are causing increased concerns over the sustainability of unsecured lending, especially in personal loans, unsecured business loans and loans against property segments. In other words, there is a deceleration in loan originations in these segments, says the
CRIF-DLAI FinTech Barometer report.
According to the report, while India remains the world’s fastest-growing major economy, recent financial instability has led to a decline in new loan originations. The Reserve Bank of India’s (RBI) financial stability report (FSR), released in December 2024, highlighted that household debt continues to rise, with subprime borrowers increasingly relying on credit for consumption purposes.
The CRIF-DLAI FinTech Barometer report warns that a sharp increase in delinquency rates could impact overall financial stability, with lenders needing to exercise greater caution in borrower selection and risk assessment.
The report also underscores the need for fintech firms to refine underwriting processes and tailor financial products to specific borrower segments. Enhanced due diligence, improved risk analytics and predictive financial modelling could help mitigate potential defaults while ensuring continued access to credit for small businesses and underserved borrowers.
Experts from CRIF High Mark and the Digital Lenders Association of India (DLAI) emphasised the importance of adopting data-driven risk assessment methodologies. They recommend lenders implement guardrails such as analysing credit score trends rather than static point-in-time scores and integrating machine-learning-based risk indices for small-ticket lending. Additionally, lenders are urged to leverage artificial intelligence and alternative credit assessment models to evaluate borrower creditworthiness beyond traditional financial metrics.
“The rapid rise in household debt and increasing delinquencies suggest that lenders must prioritise sustainable portfolio growth over aggressive expansion,” said Subhrangshu Chattopadhyay, whole-time director at CRIF High Mark. “While fintech lenders have improved financial inclusion, they must ensure that credit is extended responsibly, particularly to vulnerable borrower segments.”
Here are the key findings from the Barometer report.
Decline in loan originations: Growth in personal loan originations slowed significantly, with year-on-year growth dropping to 13.8% in September 2024, compared to 29.1% in the previous year. Additionally, the number of active personal loans fell by 4.7% y-o-y. Similarly, unsecured business loans experienced a stagnation in growth, raising concerns about credit accessibility for small enterprises.
Rising delinquencies: Portfolio at Risk (PAR) levels for personal loans saw an uptick, with PAR 31-90 days past due (DPD) rising to 1.8% from 1.5% a year earlier. The delinquency rate for loans overdue by 360+ days increased from 3.2% to 3.3%. In the unsecured lending space, late repayments have continued to climb, indicating potential liquidity stress among borrowers.
Micro and small-ticket loans at risk: The study indicates that small-ticket loans, particularly those under Rs10,000, are seeing higher risk levels, with a 13.2% increase in borrower-level PAR 90+ from June to December 2023. Many of these borrowers belong to the informal sector, making risk assessment more complex for lenders.
Shift in lending patterns: The market share of non-banking financial companies (NBFCs) in loan originations increased, suggesting a shift away from traditional banks towards alternative lenders. This shift is particularly pronounced in small-ticket lending, where NBFCs and digital lenders are playing a dominant role.
Regulatory measures and market reactions: In response to the growing concerns around credit risk, the RBI has introduced stricter lending norms, urging financial institutions to enhance due diligence and improve borrower screening processes. The central bank has also encouraged financial inclusion initiatives to balance responsible lending with the need for credit accessibility.
