ETtechConsumer credit: Fuelling India’s journey to Viksit Bharat
India’s retail lending landscape has grown at a strong 17% CAGR between FY19–23, expanding formal credit access, while maintaining low NPAs and supporting bank profitability. Despite this momentum, India remains significantly underpenetrated in credit. Retail lending accounts for just 22% of GDP, well below the 60–80% levels seen in developed economies like the US, UK, and Canada. This reveals the untapped potential in a country where over 50% of the workforce is engaged in agriculture and allied sectors, largely outside the formal banking ecosystem. As India advances toward becoming a developed economy, rising per capita incomes will likely push large segments of this informal workforce toward the formal financial system for the first time. And for this large group of people, secured credit (like mortgages) won’t be the starting point; barriers such as unclear land titles, documentation gaps, and difficulties in charge creation limit mortgage scalability.
Hence, unsecured lending will continue to serve as the first formal credit touchpoint. Currently, unsecured loans account for around 30% of India’s retail credit portfolio, compared to just 7–10% in the US, UK, and Canada. Unsecured lending has grown the fastest (CAGR of 25% between FY 19- 23) among all retail categories in India. However, there is still large headroom: unsecured loan per person in India is at only 9% (compared to 259% in the US, 173% in the UK, and 65% in Germany).
Expanding unsecured credit is essential, but must be done responsibly
India’s banking sector has so far handled this rise in unsecured credit relatively well. However, stronger risk management will be needed hereafter, especially with early signs of stress starting to appear. Almost half of those using credit cards and personal loans already hold another live retail loan, often a high-value home or a vehicle loan. Early delinquency (30+ ever DPD within 6 months of borrowing) for personal loans is at 8-9% vs 3-5% for secured products. About 11 percent of individuals originating a personal loan under ₹50,000 had an overdue personal loan at the time of borrowing. Many borrowers, sometimes tempted by online “success stories”, have taken personal loans for highly speculative activities e.g., day trading in stocks, margin trading in commodities, etc., leading to increased delinquencies. This further highlights the need for tighter risk controls, better underwriting, end use monitoring and new models that can manage growing numbers of unsecured borrowers while mitigating risk.
The Reserve Bank of India (RBI) has been proactive in managing risk. In November 2023, it raised risk weights on unsecured loans by 25%, effectively making it more capital-intensive for banks and NBFCs to lend without collateral. This has already led to moderation in credit supply: unsecured loan approval rates have dropped from 33% in 2019 to 22% in 2024, reflecting more cautious lender behaviour. While necessary, also limits access for first-time, lower-income borrowers—key to financial inclusion. Balancing credit growth with risk control is now critical. In this context, "Credit on UPI" could transform consumer lending.
Structural advantages of credit on UPI
The key advantage of Credit on UPI lies in its ability to leverage real-time transaction data for end-use monitoring & control and smarter underwriting.
Credit on UPI allows lenders to track where and how funds are spent. Each UPI credit transaction reveals merchant categories and behaviour patterns, enabling early detection of risky usage (e.g., for speculative activities). This enables timely interventions like credit-limit revisions or financial nudges to minimize delinquencies. Also, UPI offers rich insights (spending patterns, cash flow trends, and frequency of use) that enable more accurate risk assessment. This allows banks and Fintechs to dynamically adjust credit limits based on responsible usage
The journey ahead
For Credit on UPI to fulfil its promise of transforming consumer lending, several challenges must be addressed. Currently, only 11 banks offer credit on UPI. Expanding participation across the banking ecosystem will be crucial for wider adoption. The recent extension of Credit on UPI to Small Finance Banks (SFBs) is a step in the right direction. These banks serve under-served segments and can now offer instant, low-cost credit via UPI, reducing dependence on informal, high-interest sources. For small entrepreneurs and marginal farmers, this could be a game-changer- driving financial stability through data-backed, inclusive credit.
Lending apps must also rethink the user journey, offering seamless onboarding, transparent repayment terms, and real-time credit adjustments based on behaviour. These features can make credit more intuitive, especially for first-time borrowers. Integrating UPI-linked credit into e-commerce, offline retail, and recurring payments could unlock a large new lending category.
With the right mix of regulatory backing, tech innovation, and bank engagement, Credit on UPI could reshape India’s lending landscape. UPI has already proven that when trust, technology, and convenience converge, adoption follows.
The question now is: how fast can the ecosystem evolve to unlock this frontier in digital credit?
The writers are Vivek Mandhata, Managing Director & Partner, BCG India and Tirtha Chatterjee, Principal at BCG India.
India’s retail lending landscape has grown at a strong 17% CAGR between FY19–23, expanding formal credit access, while maintaining low NPAs and supporting bank profitability. Despite this momentum, India remains significantly underpenetrated in credit. Retail lending accounts for just 22% of GDP, well below the 60–80% levels seen in developed economies like the US, UK, and Canada. This reveals the untapped potential in a country where over 50% of the workforce is engaged in agriculture and allied sectors, largely outside the formal banking ecosystem. As India advances toward becoming a developed economy, rising per capita incomes will likely push large segments of this informal workforce toward the formal financial system for the first time. And for this large group of people, secured credit (like mortgages) won’t be the starting point; barriers such as unclear land titles, documentation gaps, and difficulties in charge creation limit mortgage scalability.
Hence, unsecured lending will continue to serve as the first formal credit touchpoint. Currently, unsecured loans account for around 30% of India’s retail credit portfolio, compared to just 7–10% in the US, UK, and Canada. Unsecured lending has grown the fastest (CAGR of 25% between FY 19- 23) among all retail categories in India. However, there is still large headroom: unsecured loan per person in India is at only 9% (compared to 259% in the US, 173% in the UK, and 65% in Germany).
Expanding unsecured credit is essential, but must be done responsibly
India’s banking sector has so far handled this rise in unsecured credit relatively well. However, stronger risk management will be needed hereafter, especially with early signs of stress starting to appear. Almost half of those using credit cards and personal loans already hold another live retail loan, often a high-value home or a vehicle loan. Early delinquency (30+ ever DPD within 6 months of borrowing) for personal loans is at 8-9% vs 3-5% for secured products. About 11 percent of individuals originating a personal loan under ₹50,000 had an overdue personal loan at the time of borrowing. Many borrowers, sometimes tempted by online “success stories”, have taken personal loans for highly speculative activities e.g., day trading in stocks, margin trading in commodities, etc., leading to increased delinquencies. This further highlights the need for tighter risk controls, better underwriting, end use monitoring and new models that can manage growing numbers of unsecured borrowers while mitigating risk.
The Reserve Bank of India (RBI) has been proactive in managing risk. In November 2023, it raised risk weights on unsecured loans by 25%, effectively making it more capital-intensive for banks and NBFCs to lend without collateral. This has already led to moderation in credit supply: unsecured loan approval rates have dropped from 33% in 2019 to 22% in 2024, reflecting more cautious lender behaviour. While necessary, also limits access for first-time, lower-income borrowers—key to financial inclusion. Balancing credit growth with risk control is now critical. In this context, "Credit on UPI" could transform consumer lending.
Structural advantages of credit on UPI
The key advantage of Credit on UPI lies in its ability to leverage real-time transaction data for end-use monitoring & control and smarter underwriting.
Credit on UPI allows lenders to track where and how funds are spent. Each UPI credit transaction reveals merchant categories and behaviour patterns, enabling early detection of risky usage (e.g., for speculative activities). This enables timely interventions like credit-limit revisions or financial nudges to minimize delinquencies. Also, UPI offers rich insights (spending patterns, cash flow trends, and frequency of use) that enable more accurate risk assessment. This allows banks and Fintechs to dynamically adjust credit limits based on responsible usage
The journey ahead
For Credit on UPI to fulfil its promise of transforming consumer lending, several challenges must be addressed. Currently, only 11 banks offer credit on UPI. Expanding participation across the banking ecosystem will be crucial for wider adoption. The recent extension of Credit on UPI to Small Finance Banks (SFBs) is a step in the right direction. These banks serve under-served segments and can now offer instant, low-cost credit via UPI, reducing dependence on informal, high-interest sources. For small entrepreneurs and marginal farmers, this could be a game-changer- driving financial stability through data-backed, inclusive credit.
Lending apps must also rethink the user journey, offering seamless onboarding, transparent repayment terms, and real-time credit adjustments based on behaviour. These features can make credit more intuitive, especially for first-time borrowers. Integrating UPI-linked credit into e-commerce, offline retail, and recurring payments could unlock a large new lending category.
With the right mix of regulatory backing, tech innovation, and bank engagement, Credit on UPI could reshape India’s lending landscape. UPI has already proven that when trust, technology, and convenience converge, adoption follows.
The question now is: how fast can the ecosystem evolve to unlock this frontier in digital credit?
The writers are Vivek Mandhata, Managing Director & Partner, BCG India and Tirtha Chatterjee, Principal at BCG India.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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