India's Formal Credit Expansion: CIBIL Report & Key Challenges

Context:

A recent TransUnion CIBIL report, Unlocking Access: Journey of Credit Expansion in India, notes that while formal credit access has expanded significantly, rising consumer debt, slower borrower growth, and fewer first-time borrowers pose challenges to sustainable credit growth.

What is Formal Credit?

Formal credit refers to loans provided by regulated financial institutions such as banks, NBFCs, cooperative banks, and microfinance institutions under the supervision of the Reserve Bank of India (RBI). It is characterised by:

• • • Transparent interest rates and legal safeguards.
    • Credit history creation through CIBIL and other credit bureaus.
    • Better consumer protection and access to larger, affordable loans.
    • Reduced dependence on informal moneylenders charging exorbitant interest.

Key Findings:

• • • Rising Indebtedness: Over-leveraged borrowers increased from 5% (FY17) to 18% (FY24) before easing to 15% (FY26), with younger consumers being the most affected.
    • Slowing Borrower Growth: The CAGR of credit-active consumers slowed from 14% (2017–19) to 9% (2024–26), indicating that initial financial inclusion gains are plateauing.
    • Declining First-Time Borrowers: The share of New-to-Credit (NTC) borrowers fell from 32% in 2017 to 13% in 2026, showing lenders' increasing dependence on repeat borrowers.
    • Shift in Borrowing Pattern: Consumption credit, including personal loans and credit cards, rose from 34% to 51%, reflecting a shift from asset-based to lifestyle-driven borrowing.
    • Commercial Credit Concerns: Participation in commercial lending has declined, indicating that many MSMEs remain outside the formal credit ecosystem.
    • Regional Expansion: States such as Uttar Pradesh, Madhya Pradesh, and Bihar have recorded faster credit growth than traditional leaders like Maharashtra and Tamil Nadu.

Challenges:

• • • Rising household debt and default risks.
    • Declining financial inclusion momentum.
    • Limited formal credit access for MSMEs.
    • Greater dependence on unsecured consumer credit.

Reasons for Expansion of Formal Credit:

• • • Digital Public Infrastructure: Aadhaar, UPI, India Stack, and e-KYC simplified onboarding.
    • Financial Inclusion: PM Jan Dhan Yojana expanded banking access.
    • FinTech Growth: Digital lending platforms improved credit accessibility.
    • Government Schemes: MUDRA, Stand-Up India, and CGTMSE promoted credit for entrepreneurs and MSMEs.
    • Improved Credit Information: Credit bureaus and Account Aggregator framework enhanced risk assessment.

Way Forward:

India should promote responsible lending, strengthen credit assessment, improve financial literacy, expand formal credit to first-time borrowers and MSMEs, and ensure robust regulatory oversight to maintain financial stability while sustaining inclusive credit growth.

Conclusion:

India's next phase of credit expansion must shift from merely increasing borrower numbers to ensuring responsible, inclusive, and sustainable credit growth, balancing financial inclusion with prudent risk management.