Daily spends lead to credit boom

Indians borrow more to consume rather than build assets

India’s retail credit growth is being fuelled more by how the households spend on daily, discretionary purchases, rather than the assets that they build over the long term. Thus, unsecured personal loans, via credit cards, as are other collateral-free borrowings, are more in fashion. The spends on likely heads such as homes, cars, education, and consumer durables are on the decline, or have plateaued. So is the case with loans against gold and shares. In addition, the banks have slowly but surely reduced the incentives and rewards on credit cards, which include cashback.

According to a latest study, the retail credit trends indicate a clear pivot from asset creation to consumption-led loans. A white paper by Client Associates highlights how the borrowings have changed in the recent past. First, while housing loans, a secured credit against a robust collateral, remain the largest component of personal loans, its dominance has eased. They account for 51 per cent of the total personal loans, down from 53.6 per cent in FY-2016. They still form the anchor for retail credit, but no longer tell the whole, or real, story.

Other traditional lending segments, which formed the bulk of retail credit earlier, are steadily shrinking. The share of education loans, for example, dropped from 4.9 per cent to 2.2 per cent, and loans against fixed deposits too more than halved from 4.8 per cent to 2.3 per cent. Loans against shares and bonds remain marginal at 0.2 per cent. Vehicle loans, once a key driver of retail credit, saw a decline, as they slipped marginally from 11 per cent to 10.8 per cent. A few segments reflect how the households respond to stress, emergencies, and liquidity needs. Gold loans, which surged after 2020, stabilised at 1.9 per cent. Consumer durables loans faded, and fell to a mere 0.4 per cent.

Obviously, the households rely less on secured borrowings, or loans against specific and physical collateral, and they use the financial assets for limited use, possibly to buy more shares, or invest in IPOs (Initial Public Offerings). Despite the huge surge in gold prices, loans against them stagnated in 2024, and may have gone up in 2025 due to a fresh boom phase, and come down now due to price corrections. The purchases of durables have possibly shifted to credit cards, thanks to interest-free and affordable EMIs on most high-priced items.

In comparison, the most notable shift is the rapid rise in unsecured credit. The usage of credit cards went up from 2.7 per cent to 4.8 per cent between 2016 and 2024, and grew at a compounded annual rate of more than 25 per cent. At the same time, ‘other personal loans,’ which is a category dominated by unsecured lending, expanded from 21.2 per cent to 26.3 per cent, and comprised the second-largest segment after home loans, although the percentage was almost half of the latter. As other surveys indicate, travel loans are on the rise.

What these trends signal is that Indians use unsecured credit to fund entertainment, holidays, and discretionary spending. There is a growing comfort among them to use short-term loans to finance routine purchases. There is a rising demand for quick, flexible, and collateral-free credit. The case of the shift in financing of consumer durables possibly shows that seemingly-small-ticket purchases have shifted to credit cards and personal loans, instead of dedicated financing options. Now, we use credit cards to pay for airline tickets, hotels, fine dining, movie tickets, and even to purchase monthly groceries.

Lenders, too are excited, or at least were until recently. “Since FY-2016, lenders have prioritised retail credit, initially due to weak corporate loan demand, and later due to a change in household credit behaviour. The post-pandemic strengthening of bank balance sheets further supported this trend, as this enabled banks and NBFCs (non-banking firms) to aggressively expand personal loan portfolios, nearly doubling retail credit’s footprint from 10.1 per cent of GDP in FY-2016 to 18.1 per cent in FY-2025,” stated the report. This has created a fear among some experts that Indians are excessively overleveraged in debt.

Other trends amplify these credit trends. For example, fintech-led innovations such as Buy Now, Pay Later (BNPL), and data-driven underwriting made access to unsecured credit faster, and more widespread. Clearly, India’s retail credit landscape has undergone a structural shift, as consumption drives the incremental growth rather than asset creation. More importantly, the fear that had set in due to personal defaults on credit cards, and unsecured credit in the 2010s, is vanishing, as borrowers become smart and savvy.

But, as many individuals figure out in desperation, unsecured credit is a double-edged sword. Yes, as we mentioned, the smart ones do not revolve loans on credit cards to avoid paying the huge interest. But as the central bank’s figures indicate, there is a trend of rising stress and delinquencies and stress in the unsecured portfolios. The lenders, especially banks, are caught on the wrong foot, twice. First, they do not earn enough interest, or revenues, from credit cards due to the first phenomenon. Second, they lose money due to defaults. Caught between the devil and deep blue sea (or a mountain of green), they step back.

For the banks, these trends, coupled with a rise in the use of credit cards, make the reward-incentive measure expensive. Perks like cashbacks and lounge accesses, which boosted the use of credit cards, are not viable. Regulatory changes, like higher capital requirements on unsecured lending, increased the cost of running card portfolios. Hence, issuers are shifting from broad, easy rewards to strict, spending-linked benefits. Many credit cards require higher spending thresholds, impose tighter caps, or exclude several categories to effectively lower the value of rewards. The economics has changed as high cashbacks exceed what banks earn per transaction, which makes them unsustainable.

Business models, and operations have undergone changes. Once the use of credit cards became normal, and the number of users expanded, it made sense for the banks and issuers to limit rewards, and reserve them for the high-value customers. There is no point to dole them out universally. As credit cards move from being acquisition tools to becoming core lending products, the era of easy, and generous rewards went out the window. But as mentioned before, there is a flip side to it, as is invariably the case. The credit boom can turn into a debt doom for people, if they roll over credit, or underestimate incomes.