What India’s Financial Stability Report Reveals About Its Credit Landscape
The RBI’s bi-annual Financial Stability Report holds up a mirror to our ever-evolving credit landscape and offers an insight into the complex global and domestic influences that shape it.
- Mar 19, 2026,
- Updated Mar 19, 2026 2:21 PM IST
A tale of robust domestic demand, a sound and resilient financial system, the need for a measured response to consumption-led growth, and a strong case for advancing responsible borrowing.
The RBI’s bi-annual Financial Stability Report is an excellent document for a nuanced understanding of India’s economy. It holds up a mirror to our ever-evolving credit landscape and offers an insight into the complex global and domestic influences that shape it.
The December 2025 edition of the report serves as a valuable resource to assess both current and emerging risks to the stability of India’s financial system. As microfinance practitioners, we identified several data points that stand out for their relevance. These insights are examined further through the dual lens of risk and opportunity.
1. Rising, But Still Moderate Household Debt Levels Require Careful Monitoring
India’s household debt-to-GDP ratio has climbed to 41.3%. While this is an increase from the 5-year average of 38.3%, we remain significantly below certain emerging market economies such as Malaysia (69%) and China (60%). This is simply a reflection of our cautious credit culture, one that emphasises savings. Our country is still a low-leverage household economy, as our focus is not on exponential growth but on inclusive growth.
However, the pace of this debt-to-GDP ratio increase necessitates careful monitoring because while our GDP is the 4th largest in the world, per capita distribution indicates that average household income remains low.
In our experience, great emphasis has been placed on the “Responsible Lender” framework, but we have rarely spoken about a ‘Responsible Borrower’ framework with the same rigour. This includes borrowing in line with income (FOIR), understanding the implications of the borrowing purpose, and maintaining good credit discipline. The former is frequently wrecked by the practice of taking multiple loans and borrowing through kinship networks, be it from friends, relatives or other associates. It also distorts the Debt Service Ratio (DSR) and negatively impacts a borrower’s ability to repay their loans. But the most dangerous consequence of multiple borrowings is that it promotes borrowing from one source to repay another.
Thus, embedding a ‘Responsible Borrower’ mindset coupled with strengthening Credit Bureau discipline will be critical for long-term stability.
2. A Shift in Borrowing Composition Signals a Need for Greater Borrower Education
Household borrowings are dominated by non-housing retail loans at 55.3%. This reflects lifestyle-driven borrowing but also indicates demand for consumption-led growth. If this credit is restricted solely to consumption smoothing, it’s cause for concern.
Additionally, personal loans currently comprise 22.3% of consumption borrowings, impelling India towards a credit-driven consumption retail market.
Based on firsthand experience in the field, and given that microfinance caters to the needs of the lowest strata of the population, it’s very important to educate customers on the distinction between loan purposes: for asset creation/production versus consumption. A clear understanding of the end use of loans and how sustainable, scalable income-generating activities can create a virtuous cycle, help service loans and act as a buffer against credit risk and default. In the long run, this awareness can ensure that credit growth remains sustainable and risks are managed well. Lenders also need to focus on stricter verification of the credit-purpose/end-use of loans.
Agricultural and business loans comprise the majority of household borrowings (asset creation loans stand at 36.2% and productive loans at 17.8%). This is a positive development and should be encouraged as these can fuel much-needed job growth and productivity. Credit providers should consider incentivising productive borrowing by offering lower interest rates.
3. Resilient Borrower Profiles - Are Subprime Customers Being Left Behind?
The share of prime-rated borrowers has grown, strengthening household sector resilience. While this is a positive sign, new-to-credit (NTC) customers remain thin-file. This raises a critical question: are subprime and NTC customers being left behind? If customer acquisition emphasises risk-based pricing, then poor borrowers are again pushed into the age-old trap of moneylenders and pawnbrokers.
As credit practitioners, we must ensure that risk-based pricing and stringent guardrails don’t translate into exclusion. Instead, we should focus on incentivising responsible borrowing behaviour. As discussed earlier, financial awareness and literacy (e.g. information and discipline related to investing, borrowing, money utilisation, pensions, and insurance) can play a pivotal role in shaping responsible borrowers.
A balancing act between resilience and inclusion is the need of the hour.
4. Small Finance Banks’ Expanding Footprint - A Positive Turn
Small Finance Banks (SFBs) are growing faster than the sector average. This higher growth in deposits and credit can be attributed to their footprint in microfinance and segmented lending, as well as their penetrative outreach in remote geographies and underserved segments.
This is an extremely positive development for expanding the frontiers of financial inclusion.
5. Addressing the Microfinance Sector Contraction
Borrowers have declined from 8.4 crore to 7.1 crore. While this might improve credit quality, 1.3 crore customers risk falling back into informal lending.
Aggressive post-COVID growth, coupled with external micro and macro factors, caused a significant increase in borrower delinquency over the past two years. This, in turn, resulted in extremely stringent underwriting and guardrails by the SROs (self-regulatory organisations). But responsible lending must go hand-in-hand with responsible borrowing.
The RBI has issued several instructions on responsible business conduct. Borrowers’ informed decision-making and the importance of maintaining credit discipline are paramount. Creditors must partner with borrowers in their journey by helping them increase their credit absorption capacity through opportunities like skill development, market linkages for businesses, etc.
Can digital microcredit be a way forward? Leveraging technology for credit and collection can significantly reduce the cost of providing small-ticket, well-monitored loans. This could prevent exclusion and reduce dependence on moneylenders. Alternate/additional data on borrower income could be a gamechanger, providing accurate information on income and repayment capacity. However, data infrastructure and credit discipline would be crucial scaffolding for digital lending. Credit bureaus and account aggregators will also play an increasingly important role in its regulation.
6. Climate Risk Integration Becoming a Must for Survival
The Network for Greening the Financial System (NGFS) has warned of the escalating costs of climate inaction. Vulnerable economies are expected to bear the brunt, with potential GDP losses projected at 6% in Asia and up to 12.5% in Africa under adverse scenarios.
Microfinance institutions (MFIs), serving bottom-of-the-pyramid borrowers, must first safeguard their own resilience and then actively support climate-resilient livelihoods for their clients. Climate risks pose some of the greatest threats to low-income communities, making awareness and preparedness essential.
"For example, the Punjab floods last year showed how wealthier households were able to absorb the shock, while poorer families faced greater stress and struggled to meet repayment obligations. Recurring climate events—such as floods, cyclone, droughts, irregular rainfall, and heat waves—can impact, client stability and institutional resilience."
As adaptation and transition initiatives expand, MFIs have a monumental opportunity to strengthen grassroots resilience and drive inclusive climate action. Governments can collaborate with MFIs through public–private partnerships to advance climate resilience programs, while blended finance mechanisms will be critical in scaling these efforts.
True Financial Stability Transcends Numbers
It encompasses balancing growth, inclusion, and sustainability. As practitioners, we must push for credit frameworks that empower households without exposing them to systemic risks.
India’s financial stability hinges on integrating borrower responsibility, institutional sustainability, and climate risk into our regulatory framework. Microfinance practitioners can and must play a leading role in shaping these policies at the grassroots level.
Author: Purvi Bhavsar, Co-founder and Managing Director, Pahal Financial Services | Co-author: Dr Deepali Pant Joshi, Former Executive Director, Reserve Bank of India
A tale of robust domestic demand, a sound and resilient financial system, the need for a measured response to consumption-led growth, and a strong case for advancing responsible borrowing.
The RBI’s bi-annual Financial Stability Report is an excellent document for a nuanced understanding of India’s economy. It holds up a mirror to our ever-evolving credit landscape and offers an insight into the complex global and domestic influences that shape it.
The December 2025 edition of the report serves as a valuable resource to assess both current and emerging risks to the stability of India’s financial system. As microfinance practitioners, we identified several data points that stand out for their relevance. These insights are examined further through the dual lens of risk and opportunity.
1. Rising, But Still Moderate Household Debt Levels Require Careful Monitoring
India’s household debt-to-GDP ratio has climbed to 41.3%. While this is an increase from the 5-year average of 38.3%, we remain significantly below certain emerging market economies such as Malaysia (69%) and China (60%). This is simply a reflection of our cautious credit culture, one that emphasises savings. Our country is still a low-leverage household economy, as our focus is not on exponential growth but on inclusive growth.
However, the pace of this debt-to-GDP ratio increase necessitates careful monitoring because while our GDP is the 4th largest in the world, per capita distribution indicates that average household income remains low.
In our experience, great emphasis has been placed on the “Responsible Lender” framework, but we have rarely spoken about a ‘Responsible Borrower’ framework with the same rigour. This includes borrowing in line with income (FOIR), understanding the implications of the borrowing purpose, and maintaining good credit discipline. The former is frequently wrecked by the practice of taking multiple loans and borrowing through kinship networks, be it from friends, relatives or other associates. It also distorts the Debt Service Ratio (DSR) and negatively impacts a borrower’s ability to repay their loans. But the most dangerous consequence of multiple borrowings is that it promotes borrowing from one source to repay another.
Thus, embedding a ‘Responsible Borrower’ mindset coupled with strengthening Credit Bureau discipline will be critical for long-term stability.
2. A Shift in Borrowing Composition Signals a Need for Greater Borrower Education
Household borrowings are dominated by non-housing retail loans at 55.3%. This reflects lifestyle-driven borrowing but also indicates demand for consumption-led growth. If this credit is restricted solely to consumption smoothing, it’s cause for concern.
Additionally, personal loans currently comprise 22.3% of consumption borrowings, impelling India towards a credit-driven consumption retail market.
Based on firsthand experience in the field, and given that microfinance caters to the needs of the lowest strata of the population, it’s very important to educate customers on the distinction between loan purposes: for asset creation/production versus consumption. A clear understanding of the end use of loans and how sustainable, scalable income-generating activities can create a virtuous cycle, help service loans and act as a buffer against credit risk and default. In the long run, this awareness can ensure that credit growth remains sustainable and risks are managed well. Lenders also need to focus on stricter verification of the credit-purpose/end-use of loans.
Agricultural and business loans comprise the majority of household borrowings (asset creation loans stand at 36.2% and productive loans at 17.8%). This is a positive development and should be encouraged as these can fuel much-needed job growth and productivity. Credit providers should consider incentivising productive borrowing by offering lower interest rates.
3. Resilient Borrower Profiles - Are Subprime Customers Being Left Behind?
The share of prime-rated borrowers has grown, strengthening household sector resilience. While this is a positive sign, new-to-credit (NTC) customers remain thin-file. This raises a critical question: are subprime and NTC customers being left behind? If customer acquisition emphasises risk-based pricing, then poor borrowers are again pushed into the age-old trap of moneylenders and pawnbrokers.
As credit practitioners, we must ensure that risk-based pricing and stringent guardrails don’t translate into exclusion. Instead, we should focus on incentivising responsible borrowing behaviour. As discussed earlier, financial awareness and literacy (e.g. information and discipline related to investing, borrowing, money utilisation, pensions, and insurance) can play a pivotal role in shaping responsible borrowers.
A balancing act between resilience and inclusion is the need of the hour.
4. Small Finance Banks’ Expanding Footprint - A Positive Turn
Small Finance Banks (SFBs) are growing faster than the sector average. This higher growth in deposits and credit can be attributed to their footprint in microfinance and segmented lending, as well as their penetrative outreach in remote geographies and underserved segments.
This is an extremely positive development for expanding the frontiers of financial inclusion.
5. Addressing the Microfinance Sector Contraction
Borrowers have declined from 8.4 crore to 7.1 crore. While this might improve credit quality, 1.3 crore customers risk falling back into informal lending.
Aggressive post-COVID growth, coupled with external micro and macro factors, caused a significant increase in borrower delinquency over the past two years. This, in turn, resulted in extremely stringent underwriting and guardrails by the SROs (self-regulatory organisations). But responsible lending must go hand-in-hand with responsible borrowing.
The RBI has issued several instructions on responsible business conduct. Borrowers’ informed decision-making and the importance of maintaining credit discipline are paramount. Creditors must partner with borrowers in their journey by helping them increase their credit absorption capacity through opportunities like skill development, market linkages for businesses, etc.
Can digital microcredit be a way forward? Leveraging technology for credit and collection can significantly reduce the cost of providing small-ticket, well-monitored loans. This could prevent exclusion and reduce dependence on moneylenders. Alternate/additional data on borrower income could be a gamechanger, providing accurate information on income and repayment capacity. However, data infrastructure and credit discipline would be crucial scaffolding for digital lending. Credit bureaus and account aggregators will also play an increasingly important role in its regulation.
6. Climate Risk Integration Becoming a Must for Survival
The Network for Greening the Financial System (NGFS) has warned of the escalating costs of climate inaction. Vulnerable economies are expected to bear the brunt, with potential GDP losses projected at 6% in Asia and up to 12.5% in Africa under adverse scenarios.
Microfinance institutions (MFIs), serving bottom-of-the-pyramid borrowers, must first safeguard their own resilience and then actively support climate-resilient livelihoods for their clients. Climate risks pose some of the greatest threats to low-income communities, making awareness and preparedness essential.
"For example, the Punjab floods last year showed how wealthier households were able to absorb the shock, while poorer families faced greater stress and struggled to meet repayment obligations. Recurring climate events—such as floods, cyclone, droughts, irregular rainfall, and heat waves—can impact, client stability and institutional resilience."
As adaptation and transition initiatives expand, MFIs have a monumental opportunity to strengthen grassroots resilience and drive inclusive climate action. Governments can collaborate with MFIs through public–private partnerships to advance climate resilience programs, while blended finance mechanisms will be critical in scaling these efforts.
True Financial Stability Transcends Numbers
It encompasses balancing growth, inclusion, and sustainability. As practitioners, we must push for credit frameworks that empower households without exposing them to systemic risks.
India’s financial stability hinges on integrating borrower responsibility, institutional sustainability, and climate risk into our regulatory framework. Microfinance practitioners can and must play a leading role in shaping these policies at the grassroots level.
Author: Purvi Bhavsar, Co-founder and Managing Director, Pahal Financial Services | Co-author: Dr Deepali Pant Joshi, Former Executive Director, Reserve Bank of India