Perils of Easy Credit Access

Source: The post “Perils of Easy Credit Access” has been created, based on “Perils of Easy Credit Access” published in “The Hindu Businessline” on 12 November 2025.

UPSC Syllabus: GS Paper -3- Economy

Context: Easy credit access has become a hallmark of modern finance, with banks, NBFCs, and fintech companies offering loans at the tap of a screen. While such access helps individuals meet their lifestyle and financial goals, it also increases the risk of over-borrowing, defaults, and long-term financial instability. Therefore, maintaining financial prudence and credit discipline is essential for sustainable borrowing.

Nature and Scope of Consumer Loans

1. Consumer loans include home loans, education loans, vehicle loans, and personal loans for various lifestyle and household expenses.
2. Unsecured loans such as credit cards, buy-now-pay-later schemes, and payday advances do not require collateral, making them more accessible but riskier.
3. These loans enhance consumer purchasing power, support family welfare, and contribute to economic growth through higher consumption.
4. Since unsecured loans are riskier for lenders, they often carry higher interest rates and stricter credit score requirements.

Trends in Consumer Lending

1. The total outstanding consumer loans increased from ₹49.34 trillion in September 2023 to ₹62.54 trillion in September 2025, accounting for nearly 33% of total bank credit.
2. Unsecured loans such as credit card dues and personal loans rose from ₹23 trillion to ₹30 trillion during the same period.
3. To address the rising default risk, the RBI increased the risk weight for unsecured loans from 100 to 125 in November 2023.
4. Non-Bank Financial Companies (NBFCs) and fintech firms now serve around 34–37% of bank borrowers, with over 10 crore personal loans disbursed through digital platforms by FY 2024–25.
5. This expansion has been largely driven by mobile applications and digital lending platforms offering quick and paperless approvals.

Seamless Access through Digital Platforms

1. Over 1,500 RBI-approved digital lending applications now provide instant loan approvals, sometimes within minutes.
2. Digital verification systems using PAN, Aadhaar, and credit scores have made the lending process extremely fast and user-friendly.
3. Many fintech companies use targeted digital marketing and promotional offers to attract borrowers, especially young consumers.
4. These platforms enable borrowing without physical documentation, but they also increase the temptation for impulsive financial decisions.
5. Credit Information Companies (CIBIL, CRIF, Experian, etc.) continuously update borrowers’ repayment history, allowing lenders to assess risk profiles more accurately.

Importance of Credit Discipline

1. Borrowers must ensure that the amount borrowed matches their actual repayment capacity to avoid falling into a debt trap.
2. Regular and timely repayment of EMIs helps maintain a healthy credit score, which is essential for future borrowing.
3. Maintaining a balanced mix of secured and unsecured credit reduces overall financial risk.
4. Borrowers should avoid multiple loans from different digital platforms simultaneously, as this increases repayment complexity.
5. Understanding the terms of credit, such as interest rates, processing fees, and prepayment penalties, is vital before taking any loan.
6. Financial literacy programs should be promoted to help borrowers understand the long-term impact of unsecured loans.

Challenges of Easy Credit Access

1. Rising Household Debt: Many borrowers take multiple unsecured loans without fully understanding their repayment obligations, leading to financial stress.
2. Over-Leveraging: Easy access to credit encourages overspending, making households vulnerable to defaults and legal consequences.
3. High Cost of Credit: Unsecured loans carry higher interest rates and penalty charges, which can escalate the debt burden.
4. Data Privacy Concerns: The digital lending ecosystem often involves third-party data sharing, which poses privacy and misuse risks.
5. Regulatory Challenges: The speed of fintech innovation sometimes outpaces regulation, leading to unmonitored or predatory lending practices.
6. Psychological Pressure: Defaults or overdues may lead to harassment by recovery agents and cause emotional distress to borrowers.

Way Forward

For Borrowers

1. Borrowers should exercise financial prudence by borrowing only for productive or essential needs.
2. They should regularly check their credit reports and maintain transparency in financial transactions.
3. Financial planning and budgeting should be integral before taking any new credit.

For Lenders

1. Lenders must follow responsible lending norms, ensuring that loans are extended only to creditworthy borrowers.
2. Transparency in loan agreements, interest computation, and repayment terms should be mandatory.
3. Lenders should use technology responsibly, ensuring data security and ethical use of borrower information.

For Regulators

1. The RBI should continue monitoring the digital lending ecosystem and enforce strict licensing norms for fintech firms.
2. Regular audits and grievance redressal mechanisms should be strengthened to protect borrowers from exploitation.
3. Financial inclusion policies should focus equally on borrower education and credit awareness, not just loan accessibility.

Conclusion: Easy credit access, while beneficial for financial inclusion and economic growth, also brings significant challenges related to debt sustainability and consumer protection. Borrowers must adopt cautious financial behavior, lenders should prioritize responsible lending, and regulators must ensure effective oversight. A balanced approach among all stakeholders will help ensure that credit accessibility empowers rather than endangers financial well-being.

Question: Easy access to consumer credit has become a double-edged sword in the Indian economy. Discuss the benefits and risks associated with the growing trend of unsecured and digital lending.