Even though more Indians now have access to banks, a large number of low-income families still depend on informal loans, such as from moneylenders or friends, according to a new report by Piramal Enterprises Ltd.
The study shows that while bank account ownership has improved, access to formal credit is still out of reach for many poor, rural, and self-employed Indians.
Poor households still borrow informally
Among families earning less than Rs 2 lakh per year, borrowing from informal sources went up by 5.8 per cent every year from FY19 to FY23. At the same time, their formal borrowing — from banks or NBFCs — actually fell by 4.2 per cent.
In 2021, the number of informal borrowers was 2.63 times higher than formal borrowers in India — a big gap compared to countries like Brazil (0.6x) and the US (0.27x).
Pandemic made it worse
COVID-19 pushed even more people into informal borrowing. Job losses and reverse migration increased financial stress in low-income areas. Over 55 per cent of daily wage workers were found to be using informal loans post-pandemic, the report said.
While states like Kerala, Karnataka, and Tamil Nadu saw better formal loan access thanks to gold loans and fintech, others like Bihar, Jharkhand, and West Bengal had over 57 per cent of households relying on informal loans.
NBFCs helping, but need support
The report highlights the important role of Non-Banking Financial Companies (NBFCs) and microfinance institutions (MFIs) in serving areas where regular banks don’t reach.
“India’s financial inclusion story has delivered impressive gains in access, but the next chapter must focus on usage — specifically, timely, affordable, and appropriate credit,” said Debopam Chaudhuri, Chief Economist at Piramal Enterprises.
“For millions of informal workers, small entrepreneurs, and rural households, NBFCs are often the only channel for formal credit. Strengthening them is essential to bridging the credit gap,” he added.
To improve formal credit at the last mile, the report suggests:
Setting up a low-cost funding facility for NBFCs
Allowing some NBFCs to accept deposits
Giving liquidity support to top-tier NBFCs
Changing the SARFAESI Act to help lenders recover smaller loans more easily
India must focus on affordable credit, not just access
While more than 77 per cent of adults now have bank accounts, the real challenge is making sure they can actually get loans when needed, the report argues.
Without timely and fair credit, poor families may continue to rely on costly and unsafe informal borrowing, which can lead to long-term financial stress.
