The Era of Easy Digital Credit
Not long ago, India's credit market was defined by explosive growth, especially in the unsecured lending space. Driven by a booming fintech ecosystem and a push for financial inclusion, personal loans, consumer durable financing, and credit cards became
widely accessible. Lenders, both traditional banks and new-age non-banking financial companies (NBFCs), competed fiercely to acquire customers, often prioritizing speed and ease of approval. This expansion successfully brought millions of new borrowers into the formal credit system, with the share of credit-active consumers more than doubling in recent years. Much of this growth was powered by a focus on consumption credit, which includes personal loans and credit cards, becoming the dominant segment.
A Necessary Course Correction
This rapid expansion, however, came with growing pains. The Reserve Bank of India (RBI) began flagging the rapid build-up of unsecured retail credit as a potential systemic concern. Data revealed a worrying trend: delinquency rates for smaller personal loans were rising, and a significant number of consumers, particularly younger ones, were becoming over-leveraged. A recent study by TransUnion CIBIL noted that the share of over-leveraged consumers rose threefold between 2017 and 2024. In response, the RBI intervened with preventative measures in early 2026. It increased the risk weights for unsecured consumer loans, making it more expensive for banks and NBFCs to disburse them. This move forces lenders to set aside more capital for each loan, compelling them to be more cautious in their lending practices.
From Quick Sanctions to Repayment Capacity
The new environment is pushing a fundamental change in how creditworthiness is assessed. While a good credit score remains crucial, the emphasis is shifting from a simple eligibility check to a holistic evaluation of a borrower's financial health. Lenders are now scrutinizing an individual's entire debt profile, income stability, and overall ability to manage repayments over the long term, not just for one specific loan. The process is becoming more data-driven, with lenders using advanced analytics to predict financial behaviour. Furthermore, new RBI guidelines have mandated stricter income verification for personal loans, effectively making it harder for those with minimal documentation or lower incomes to get approved for significant amounts. This represents a clear pivot from prioritizing loan book growth to ensuring asset quality.
What This Means for Borrowers
For the average consumer looking for a loan, this shift translates into a more rigorous and potentially slower approval process. The days of instant, no-questions-asked loans are likely numbered. Applicants should expect to provide more detailed documentation to prove their income and repayment capacity. Rejection rates may increase, especially for new-to-credit individuals or those with a high debt-to-income ratio. While this might seem like a barrier, the change is ultimately aimed at protecting both the financial system and the borrowers themselves from unsustainable debt. Lenders are becoming more selective, but this also encourages more responsible borrowing habits. The industry's focus is evolving from simply adding new customers to deepening relationships with existing, credit-worthy borrowers.
Balancing Long-Term Growth and Stability
This recalibration of the credit market is a sign of maturity. While overall credit growth remains strong, the pace of adding new borrowers has moderated. This suggests the easy gains from the initial wave of financial inclusion are tapering off, and the next phase of growth will need to be more strategic and sustainable. By emphasizing total repayment capacity over rapid acquisition, the RBI and financial institutions are working to prevent a credit bubble and ensure the long-term health of India's banking sector. This prudent approach aims to create a more resilient financial ecosystem where credit expansion supports genuine economic growth without creating undue risk for individuals or the system at large.
