Small Loans, Big Trouble: Why Are Young Indians Defaulting?

India’s young generation is independent, ambitious, and tech-savvy. But with this confidence comes a growing problem — many are defaulting on small personal loans, especially those under ₹50,000. Recent data from CRIF and the Digital Lenders Association of India (DLAI) shows that around 26% of these loans haven’t been repaid for more than 90 days, making them non-performing assets (NPAs).

Alarming Defaults on Tiny Loans

The most concerning trend is seen in loans under ₹10,000, where the default rate is the highest. These loans were mostly disbursed between December 2023 and June 2024. In 2019, the NPA rate for small loans was 13.9%. By July 2023, this figure had doubled to 26.2%. Even for loans up to ₹1 lakh, the NPA rate rose from 12.4% to 14.4%.

Read More: RBI Governor Flags Liquidity Risks in India’s Money Market.

Who Is Giving These Loans?

Most of these loans are issued by NBFCs (non-banking financial companies) through digital apps. They mainly focus on smaller towns and rural areas — places that traditional banks often don’t reach. These loans are easy to get and require little paperwork, making them attractive to young people. However, they’re now turning into a serious financial burden for many.

Rising Stress in Microfinance

According to an RBI report, from March to September 2024, stressed microfinance loans (overdue between 31 and 180 days) increased from 2.15% to 4.3%. Borrowers with multiple loans or higher outstanding amounts showed more signs of financial stress.

Why Are Young People Defaulting?

• Lifestyle Spending: Young consumers are spending more on lifestyle and aspirational products, often influenced by social media and e-commerce.
• Easy Credit Access: Fintech apps and Buy Now Pay Later (BNPL) services offer quick loans with little background check.
• Irregular Income: Many Gen Z workers are freelancers or part of the gig economy, meaning their income isn’t stable.
• Lack of Financial Knowledge: Many don’t fully understand how loans work — including interest rates, penalties, and the impact on credit scores.
• Lender Gaps: Financial institutions are sometimes too eager to offer credit without proper risk checks.

What Needs to Be Done?

• Financial Education: Start teaching students about money management and credit from an early age.
• Responsible Lending: Lenders must ensure loans are given based on real repayment ability, not just digital presence.
• Greater Transparency: Clear terms and penalties, especially in BNPL services, are crucial.
• Savings and Emergency Funds: Encourage young people to save and build financial backups.
• Innovation with Responsibility: All stakeholders must work together to ensure the financial health of India’s youth.

Conclusion

As small loans become easier to access, it’s vital to equip young Indians with the right tools and knowledge to manage them wisely. With responsible lending and stronger financial literacy, we can help build a financially secure and empowered generation.

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