India’s Credit Divide: Formal access grows, but informal borrowing persists

The CMIE surveys highlight stark regional imbalances in institutional borrowing across India.

By Debopam Chaudhuri

Over the past decade, India has made significant strides in advancing financial inclusion, with policymakers prioritizing accessible, affordable, and secure financial services to foster inclusive growth. As defined by the Reserve Bank of India (RBI), financial inclusion aims to integrate all citizens into the formal financial ecosystem, ensuring transparency and resilience through multi-stakeholder participation.

The relevance of financial inclusion for a nation’s economic development is well captured across the 2030 Sustainable Development Goals, where it is featured as a target in eight of the seventeen goals, including eradicating poverty; ending hunger; achieving food security and promoting sustainable agriculture; advancing health and well-being; achieving gender equality and economic empowerment of women; promoting economic growth and jobs; supporting industry, innovation, and infrastructure; and reducing inequality.

Success in deposits, lag in credit penetration

India’s post-COVID experience reveals a mixed outcome. Interventions like the Pradhan Mantri Jan Dhan Yojana (PMJDY), coupled with Aadhaar and mobile connectivity, successfully brought millions of unbanked individuals into the formal system. By May 2025, over 55 crore Jan Dhan accounts were opened (since the scheme’s inception), with 56% held by women—a commendable achievement. Digital transactions surged, reflecting greater deposit-side participation.

However, credit penetration—the asset side of banking—has lagged. Despite the surge in account openings, India’s financial inclusion ranking remains below peers like Brazil, South Africa, and Russia. A critical gap lies in the inability to convert new account holders into first-time borrowers from institutional lenders (banks, NBFCs, and fintechs).

Persistent credit deficit: A growth constraint

World Bank estimates India’s private credit-to-GDP ratio at just 55%, far below the 162% average of other four largest economies. This deficit translates into a lack of growth capital, stifling entrepreneurship and household economic mobility.

Alarmingly, non-institutional lenders continue to dominate credit access for low-income households and self-employed entrepreneurs. According to CMIE’s Consumer Pyramid surveys (2023):

* Economically weaker households borrowing from informal sources grew at 6% annually (FY19-FY23), while those securing institutional credit uptake contracted by 4% yearly.

* Self-employed entrepreneurs relying on informal loans grew at 13% annually, compared to 8% growth in those borrowing from institutional sources.

Consequently, over 50% of registered MSMEs lack access to formal credit, forcing them into high-cost, exploitative borrowing.

State-wise disparities in institutional credit access

The CMIE surveys highlight stark regional imbalances in institutional borrowing across India. States with higher per capita incomes—such as Andhra Pradesh, Kerala, Tamil Nadu, Telangana, Maharashtra, and Gujarat—exhibit significantly greater reliance on formal credit channels. This trend underscores deeper penetration of banking services, NBFCs, and fintech lending in southern and western India, likely driven by better financial infrastructure, higher literacy, and stronger economic activity.

Conversely, low-income states—including Odisha, Madhya Pradesh, Assam, Rajasthan, and Uttar Pradesh—lag in institutional credit access. Informal lenders dominate these regions, perpetuating cycles of high-cost debt and economic hardships.

Without addressing these gaps, India’s financial inclusion gains will remain incomplete, leaving millions dependent on informal credit—and missing the full potential of inclusive growth.

NBFCs: Powering financial inclusion through agile credit delivery

Non-Banking Financial Companies (NBFCs) have emerged as pivotal players in advancing India’s financial inclusion agenda. Their agile underwriting processes, robust risk management, and deep last-mile penetration enable them to serve segments traditionally excluded by banks—a role consistently acknowledged by both the government and regulators.

Regulatory Reforms & Emerging Challenges

Recognizing NBFCs’ systemic importance, regulators have introduced stricter governance and risk-management norms, particularly for the top 15 NBFCs. These measures have strengthened capital adequacy and asset quality, but they have also increased compliance burdens and funding costs. To sustain NBFCs’ growth as engines of inclusive credit, policymakers must address these challenges.

Key Reforms to Bolster NBFC-Led Financial Inclusion

1. Liquidity Backstop Facility – The RBI should introduce a liquidity window for top-tier NBFCs to stabilize short-term liabilities, improving credit ratings and lowering borrowing costs.

2. Deposit-Taking Licenses for Qualified NBFCs – Well-managed, large NBFCs should be permitted to accept deposits (with safeguards), diversifying funding sources beyond banks and reducing asset-liability mismatches (ALM risks).

3. Lower SARFAESI Threshold for Faster Recovery – Reducing the enforcement threshold under SARFAESI from ₹20 lakh to ₹1 lakh would expedite recoveries, encouraging NBFCs to expand small-ticket lending.

Conclusion: Unlocking NBFCs’ full potential

By lowering funding costs and easing operational constraints, these reforms would empower NBFCs to deepen financial inclusion, particularly for MSMEs, low-income households, and informal entrepreneurs. Given their proven ability to bridge India’s credit gap, a supportive regulatory environment will be crucial in ensuring NBFCs remain at the forefront of inclusive, resilient growth.

(The author is Chief Economist, Piramal Group.)

Views are personal and do not represent the stand of this publication.