.To enhance the share of formal finance, Debopam Chaudhuri, Chief Economist, Piramal Enterprises, says that non-banking finance companies can step in to bridge this gap, provided they are given access to cheaper resources such as the ability to raise fixed deposits and a liquidity backstop window by the RBI to secure short-term loans for top-tier NBFCs.
The findings of the report show micro-business owners and economically weaker segments (EWS and LIG) remain underserved in terms of
access to formal credit, while banks and finance companies are targeting Tier 2 and Tier 3 towns for financial inclusion.
“These segments of Bharat continue to depend heavily on informal channels, with banking and fintech innovations yet to significantly make a meaningful impact on their access to formal credit,” Chaudhuri stated.
The economic aftermath of the COVID-19 pandemic triggered major shifts in borrowing behaviour. Reverse migration increased informal and agricultural employment in lower-income states, further boosting dependence on informal credit.
“Over 55% of daily-wage households reported active informal loans, even as formal lenders became more cautious due to rising credit risk,” Chaudhuri said.The report also reveals stark state-level disparities. While Kerala, Tamil Nadu, and Karnataka show strong formal credit presence, driven by gold loans and fintech usage, states like Bihar, Jharkhand, and West Bengal have over 57% of households relying on informal borrowing. Notably, Punjab has transitioned from a ‘high-income, low-borrowing’ profile in FY19 to a ‘high-borrowing, low-income’ state, implying increasing reliance on informal credit due to lower penetration of financial inclusion.Data indicate that although there were early signs of a shift from non-institutional to institutional borrowing between FY15 and FY19, the disruptions caused by COVID-19 and the accompanying rise in unemployment reversed this trend. Many borrowers were compelled to return to informal lenders, a pattern that coincided with large-scale urban-to-rural reverse migration and a subsequent increase in agricultural employment triggered by the 2020 lockdowns.
At the global level, while other economies, both developed and developing, witnessed a declining trend in the share of non-institutional credit, India observed rising incidences of non-institutional lending vis-à-vis institutional lending. In 2021, borrowing from non-institutional sources was 2.63 times that of borrowing from institutional sources in India, compared to 0.6 times in Brazil and 0.27 times in the USA. “This implies that for every two people borrowing from institutional sources, five people were opting for non-institutional sources of borrowing,” Chaudhuri said.
The data suggest rising risk aversion of institutional lenders to fund daily-wage workers with no long-term work commitments, which has prompted wage labourers to rely on non-institutional moneylenders.
More than 55% of households associated with this profession have active loans, largely from non-institutional sources, highlighting both the demand for loans and the lack of supply from institutional sources, Chaudhuri said in his report titled Prevalence Of Non-Institutional Borrowing Among Indian Households: A Pre and Post COVID-19 Analysis.
Self-employed entrepreneurs are increasingly relying on non-institutional sources, with the annualised growth of households borrowing from such sources rising at a much faster pace than those borrowing from institutional lenders. “This depicts increased risk aversion among institutional players to support small businesses,” the report said.
In the case of industrial workers and white-collar professionals, incidences of non-institutional borrowing are slowing down due to the advent of new-age fintech lenders and easier access to institutional credit. These cohorts appear to be the biggest beneficiaries of the democratisation of finance currently underway in India, notes the report.
Over the last decade, multiple policy initiatives resulted in 77.5% bank account ownership among adults by 2021. Measures like the India Stack, policy interventions such as Jan Dhan (2014), Mudra (2015), Svanidhi (2020), and Vishwakarma (2023) Yojanas, along with the arrival of fintech players who harnessed technology to curate financial services for the previously unbanked population, have contributed to this progress.
The data used for this analysis were sourced from the Centre for Monitoring Indian Economy’s (CMIE’s) Consumer Pyramid Household Survey (CPHS) dataset. This private agency conducts high-frequency, large-scale surveys that have become increasingly popular for assessing short-term changes in the economic conditions of Indian households.
The report says NBFCs can facilitate migration from informal to formal sources of borrowing if they are supported in reducing their funding costs, which would enable passing on to end borrowers,” Chaudhuri said.
Measures such as a liquidity backstop window by the RBI to secure short-term loans for top-tier NBFCs can improve their credit ratings and reduce borrowing costs. Additionally, granting deposit-taking licences to well-managed, large NBFCs, with appropriate regulatory safeguards, would allow these institutions to diversify funding sources beyond banks and raise long-term liabilities at lower costs, thereby reducing ALM risks.
A dedicated refinancing window for NBFCs is urgently needed to alleviate liquidity concerns. Furthermore, simplifying the ease of doing business for these institutions by lowering the loan amount threshold for enforcing security interests under the SARFAESI Act from ₹20 lakh to ₹1 lakh would be highly beneficial. “These reforms would equip NBFCs with greater capacity to expand their reach, serving a larger portion of India’s population who still struggle to access formal financial services,” said Chaudhuri.
