Context:
Despite near-universal access to bank accounts (96% households as per NFHS-5), recent data from CMIE and Piramal Enterprises show a rising trend in informal borrowing among low-income households due to limited access to formal credit.
What is Informal Credit?
- Credit from non-regulated sources such as:
- Moneylenders, pawnshops, friends/family, chit funds, etc.
- No formal documentation, transparency, or consumer protection.
- Often high-interest and exploitative in nature.
Key Trends in Informal Credit Usage
- Formal Credit Fall:
- 4.2% decline in formal credit among poor households (CMIE, 2023).
- Rising Informal Borrowing:
- 5.8% rise in informal borrowing among households earning ₹1–2 lakh annually.
- Rural Dependence:
- 75% of rural adults still rely on informal credit in some form (NABARD, 2019).
- Volume of Informal Lending:
- Informal credit market estimated at ₹1.4 lakh crore (CRISIL, 2022).
Causes of Informal Credit Reliance
- Access Barriers to Formal Credit:
- No collateral, income proof, or credit history.
- Bureaucratic hurdles and digital exclusion.
- Perceived High Risk by Banks/NBFCs:
- Low-income borrowers often seen as non-creditworthy.
- Result: Credit rationing and risk-averse lending.
- Mismatch in Credit Demand-Supply:
- Poor need small-ticket, instant, and flexible loans, often for consumption or emergencies.
- Formal institutions unable to cater to urgent, localized needs.
Implications for Financial Inclusion
- Financial Access ≠ Financial Empowerment:
- While bank account ownership is high, credit access remains poor.
- Risk of Debt Trap:
- Informal loans often carry high-interest rates and can push borrowers into a cycle of debt.
- Undermines Digital and Formal Finance Ecosystem:
- Weakens trust in formal credit institutions and limits growth of digital lending platforms.
