The National Statistics Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI), recently released the Provisional Estimates (PE) of Annual Gross Domestic Product (GDP) for the financial year (FY) 2024–25, along with the expenditure components used in calculating GDP at constant (2011–12) prices. Real GDP is estimated to grow by 6.5% in FY 2024–25. Among various expenditure components, Private Final Consumption Expenditure grew the most—at 7.2%—indicating that India remains a consumption-driven economy. This underscores the importance of examining the financial mechanisms that support such consumption.

Recent news in prominent dailies provides insight into the financial health of institutions financing consumer expenditure at the bottom of the pyramid and beyond. One report stated that five leading microfinance lenders (MFLs) wrote off approximately ₹2,440 crore in bad loans during the fourth quarter (January–March) of FY 2024–25 as part of a balance sheet clean-up exercise. These write-offs, which directly affect profitability, are notable given the historically strong credit culture among bottom-of-the-pyramid borrowers. A similar write-off of nearly ₹300 crore occurred a year earlier. In line with prudential banking norms, growing write-offs require higher provisioning, thereby directly impacting the profit and loss accounts of lending institutions. Cumulatively, such write-offs have risen from ₹38,000 crore at the end of March 2024 to ₹61,000 crore by March 2025.

Analysis of the National Sample Survey Office (NSSO) consumption expenditure data from March 2024 reveals that 95% of rural households and 70% of urban households have annual incomes of less than ₹3 lakh. According to the Reserve Bank of India's (RBI) Regulatory Framework for Microfinance Loans (2022), households earning below ₹3 lakh annually are eligible for microfinance. This suggests that nearly 80% of Indian households fall within the target segment for microfinance loans. Despite this large potential market, access to loans remains constrained due to multiple factors.

Loan writeoffs

A key issue is the increasing trend of loan write-offs by MFLs, many of which operate as Non-Banking Financial Companies (NBFCs). Analysts cite over-leveraging by borrowers, the collapse of the Joint Liability Group (JLG) model, high staff attrition, and regional disruptions—especially in some southern states—as major reasons behind rising defaults. Under the JLG model, homogenous groups from the same locality are formed and loans are disbursed to individuals within the group. An alternative, the Self-Help Group (SHG) model—initiated by NABARD in 1992 and currently driven by the National Rural Livelihoods Mission (NRLM)—has also grown significantly.

The SHG-Bank Linkage Programme (SBLP), supported by NRLM and the National Urban Livelihoods Mission (NULM), accounted for outstanding loans of ₹2.59 lakh crore as of March 2024. Both models—SHG and JLG—have seen considerable growth. As of September 2023, the loan book of NBFCs stood at around ₹37 lakh crore. While institutional sources like banks and NBFCs have become preferred credit channels (used by nearly 75% of households), about 25% of households still rely on non-institutional sources—relatives, landlords, and moneylenders—highlighting the persistent last-mile challenge in financial inclusion.

The RBI’s directive of March 14, 2022, deregulated microloan pricing to promote transparency and competition. Earlier, interest rates were capped at margins of 10–12% based on the asset size of NBFCs, with a typical upper rate of 23.13%. Post-deregulation, lenders have been allowed to determine interest rates using their own models. However, a significant reduction in interest rates for microfinance borrowers has not materialised. Higher policy rates, increased cost of funds for NBFC-MFIs, and pandemic-related losses are cited as reasons.

Microfinance outreach

As for outreach, approximately 300 out of 780 districts show a microfinance depth of 47.8% among eligible households. In the 112 ‘Aspirational Districts’ identified for accelerated development by central and state governments, the outreach depth is a promising 44.7%. This highlights the growing ability of microfinance institutions to deliver inclusive financial services. Moreover, with lower debt-equity ratios due to greater equity inflows, the NBFC sector appears well-positioned for expansion—though challenges like elevated borrowing costs and reduced mobilization in the initial quarters of FY 2024–25 remain. 

Unsecured lending 

A second recent news item emphasized that unsecured loans by fintech firms are expected to play a key role in meeting retail credit demand in the years ahead, as many households lack collateral due to being early in their asset formation cycle. According to Boston Consulting Group’s Global Fintech Report 2025, India's robust credit bureau infrastructure has enabled the rise of unsecured lending. Consumer credit demand is being driven by macroeconomic growth and evolving attitudes toward debt.

The report projects that India’s affluent middle class—currently 31% of the population—will grow to 40% (around 600 million people) by 2031. Currently, only 65% of India’s personal bank credit is secured, compared to 90% in the US. Fintech-led digital lending, growing at a CAGR of 35% over the past 11 years, has played a critical role in expanding credit access. However, recent RBI regulations requiring higher capital reserves for lenders have moderated the growth of unsecured lending—from 24% between 2021–2023 to 12% in 2023–2024.

Risk assessment

In its Financial Stability Report 2024, the RBI flagged personal loans disbursed via digital apps as having the highest share of overdue accounts—raising concerns for financial stability. Since 2017, banks have scaled back industrial lending—after a spate of large NPAs—and focused more on retail lending, including personal and housing loans, and credit card receivables. The mid-2010s also saw a surge in instant loan apps, which targeted younger, digitally literate users but inadvertently raised default risks.

In a consumption-driven economy like India, expanding credit access—through microfinance NBFCs and fintech lenders—is crucial. However, regulators aInd policymakers must closely monitor this space to avoid large-scale defaults. While underserved consumer segments depend on such loans for upward mobility, repayment capacity must not be overlooked. Sustainable livelihoods and employment generation will be essential to ensuring both credit access and creditworthiness. Pushing collateral-free loans without robust risk assessment and provisioning norms, despite the availability of strong credit information systems, could elevate default risks in the consumer credit sector.

(The writer is a retired Special Secretary in India’s Ministry of Labour. Views are personal. He can be reached at ppmitra56@gmail.com)