Loan defaults: Small loan defaults on the rise – should we worry?

There has been an increase in defaults on small-ticket single loans, which are less than Rs 10,000, in comparison to larger loans. This trend is causing concern among money lenders and is impacting borrowers in both urban and rural areas. It is crucial for both borrowers and lenders to investigate the reasons behind these defaults in order to mitigate risks and ensure that lending practices are prudent and cautious.

The Reserve Bank of India has expressed apprehension regarding the increase in unsecured lending, prompting banks to improve their monitoring systems in light of the growing household debt and the potential risk of borrowers becoming over-leveraged. This is essential in order to curb the ongoing surge in household debt and loans used for consumption.

CA Nitin Kaushik, in a social media post, noted that the banking sector in India is currently experiencing an increase in small loan defaults, with private banks reporting bad loans ranging from 1.42% to 4.7%. 

He highlighted that this rise in defaults can be attributed to several factors:

Slower economic growth at 6.4% is placing strain on borrowers.

Stricter lending regulations have resulted in fewer easily accessible loans, impacting small businesses and individuals.

Uncertainties in employment and the escalating cost of living are making it more challenging for borrowers to make their EMI payments.

"India’s banking sector is facing a spike in small loan defaults, with private banks reporting bad loans between 1.42%–4.7%. Experts believe the situation might stabilize by mid-2025, but if defaults keep rising, it could lead to tighter credit policies and a domino effect on consumer spending," Kaushik noted.

Loan defaults

A default occurs when a borrower fails to make required payments on a debt. This can happen on secured debt, like a mortgage loan backed by a property, or on unsecured debt, such as credit cards or student loans. Defaults can lead to legal consequences for borrowers and may restrict their access to future credit opportunities.

According to recent news reports, data from the September quarter of the financial year 2025 shows that there is a higher delinquency rate among small-ticket personal loans, specifically those under Rs 10,000, compared to larger loan amounts. The report highlights that borrowers who took out loans between December 2023 and June 2024 are experiencing the peak of these defaults.

The data also points out that non-banking financial companies (NBFCs) have been the primary lenders in this segment of new loan originations. These NBFCs have been extending credit to borrowers outside the top 100 cities, contributing to the increase in market share for personal loans in terms of both value and volume.

The growth in small-ticket loans is seen as part of a larger effort to promote financial inclusion through digital lending platforms. 

The central bank tightened lending norms in response to a rise in defaults, specifically in small-ticket unsecured personal loans. Risk weights on personal loans, credit card exposures, and lending to non-banking financial companies (NBFCs) were increased by the RBI. Consequently, banks adopted a more cautious approach, resulting in a decrease in lending, particularly to borrowers lacking an established credit history.