Rise in Informal Borrowing Among Poor Households in India

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

1. Access Barriers to Formal Credit:
   • No collateral, income proof, or credit history.
   • Bureaucratic hurdles and digital exclusion.
2. Perceived High Risk by Banks/NBFCs:
   • Low-income borrowers often seen as non-creditworthy.
   • Result: Credit rationing and risk-averse lending.
3. 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.

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