Financial Inclusion Fails to Bridge Credit Gap: Informal Loans Rise Among India’s Poor
New Delhi | July 13, 2025 —Despite the success of India’s financial inclusion initiatives, with nearly universal access to bank accounts, a concerning trend is emerging across the country’s economically weaker segments. Poor and low-income households are increasingly depending on informal and more expensive sources of credit, even as formal banking penetration continues to deepen.
Government data indicates that by 2021, around 96% of Indian households had at least one member with a bank account. However, the availability of credit to these same households has remained limited. The financial system’s outreach has largely focused on deposit-side inclusion, leaving the credit needs of the lower-income population unmet.
Shift Away from Formal Credit
Recent analysis based on data from the Centre for Monitoring Indian Economy (CMIE) reveals a worrying contraction in institutional lending among India’s poorest. Between 2018–19 and 2022–23, formal borrowing by economically weaker sections—earning between ₹1–2 lakh annually—declined by over 4%. In contrast, informal borrowing among the same segment grew by nearly 6%. These informal lenders include moneylenders, chit funds, shopkeepers, and friends.
This shift is not limited to the lowest income group. Households earning ₹2–5 lakh a year saw 10.4% growth in formal borrowing but an even higher 12.6% rise in informal borrowing. The trend persisted in the ₹5–10 lakh middle-income group as well, where non-institutional credit growth outpaced formal lending.
Credit Scores and Systemic Exclusion
One of the key barriers preventing access to institutional credit for these groups is the reliance on credit scores. Low-income earners, many of whom work in informal sectors, often lack sufficient credit history or income documentation to qualify for loans from banks and non-banking financial companies (NBFCs).
As a result, they are pushed toward unregulated lenders who offer quick access to funds—albeit at exorbitant interest rates. Some borrowers are reportedly paying as high as 40%–50% interest annually. This contributes to a cycle of debt, where individuals take new loans to repay older ones, often leading to chronic financial instability and defaults.
Early Signs of Distress in Microfinance Sector
While it’s difficult to quantify defaults on informal loans due to the lack of documentation, microfinance loan data serves as a close proxy. Microfinance borrowers share similar profiles with informal borrowers—typically those in the lower economic spectrum and borrowing in small amounts.
Data from Sa-Dhan, a self-regulatory body authorized by the Reserve Bank of India (RBI), shows that overdue microfinance loans—those unpaid for more than 90 days—rose from 1.8% in December 2022 to 3.2% by December 2024. More recent figures from the Fintech Association for Consumer Empowerment indicate that this rate climbed further to 3.6% by March 2025.
These rising default rates point to increasing financial stress among the most vulnerable populations, many of whom are using both microfinance and informal credit options simultaneously.
Lack of Risk Appetite Among Institutional Lenders
Experts suggest that institutional lenders remain cautious about lending to individuals earning below ₹2 lakh annually. This demographic includes blue-collar workers, agricultural laborers, and informal sector employees—many of whom require short-term liquidity to manage day-to-day needs or emergencies.
Due to the high risk associated with such lending and the lack of credit data, banks and NBFCs often stay away, forcing borrowers to rely on local, informal lenders, who are more flexible but far more expensive.
Trend Persists in FY24 and FY25
Preliminary data for financial years 2023–24 and 2024–25 suggests that this trend is continuing. Growth in institutional loans to the bottom-income segments has slowed further, indicating a sustained reliance on informal sources.
This signals an urgent need to revisit India’s financial inclusion strategy. While account penetration has achieved remarkable success, the gap in access to affordable credit remains a major roadblock for economic mobility and poverty reduction.
Final Thoughts from TheTrendingPeople.com
India’s financial inclusion story remains incomplete if credit access does not accompany banking penetration. The surge in informal borrowing among the poor highlights the limitations of current lending models and regulatory frameworks. Without targeted interventions to increase credit access for low-income and financially excluded households, the risk of debt traps and rising defaults will continue to grow. Bridging this gap must now become a national priority for both policymakers and the banking sector.