India's borrowing habits are reaching dangerous territory, warns Nithin Kamath, founder and CEO of Zerodha.
Small-ticket personal loans and credit card borrowing are on the rise, often driven by aggressive marketing from fintech apps. Kamath pointed out an alarming trend: “Unaffordable loan defaults have started to increase among this segment. These deviations started showing in the numbers of banks and NBFCs a few quarters ago. We will know the true extent of the problem in the next few quarters.
Kamam also shared CRIF data showing how private debt in India now stands at Rs 13.7 crore. Public sector banks carry 38% of this burden, private banks 33% and NBFCs 24%.
However, it is the meteoric rise in small-ticket loans — many under Rs 10,000 — that raises serious concerns. NBFCs dominate this segment, disbursing 94% of such loans, and their share of new lending grew to 38.7% in the first half of FY25 from 33.2% last year.
“The lowest-hanging fruit and best thing you can do with your personal finances is to pay off all your high-interest debt, including credit cards,” advises Kamath.
“If you're in debt, the psychological effects will show up everywhere, from your personal life to the workplace.”
Small-ticket loans are especially problematic. Among borrowers who took loans between Rs 10,000 and Rs 50,000, nearly 29.3% experienced a drop in credit score within six months of taking the loan. Alarmingly, instead of slowing down, these people took on 62.7% more debt, and increased their total debt by 37.6%.
Delinquencies are rising fast in smaller cities, where the percentage of loans past due between 31 and 180 days rose from 6.8% to 8% in a year. Defaults in 360 days have risen to 39.7% for loans below Rs 10,000 compared to 24.5% last year.
Kamat reflected on his personal experience: “The worst time in my life was when I went into debt to spend money on things I didn't really need. The first lesson in personal finance is to borrow, which you can be sure will earn you more return than the cost of money.
These trends are taking place against the backdrop of a broad credit market expansion. For example, the unsecured business loan segment has grown by 43.5% over the past year to Rs 7.8 crore. But in smaller cities, where economic growth has not kept pace with credit expansion, crime is rising in this category as well.
Kamath's advice is clear: “Even before you save and invest, the first thing you should do is ensure you are debt free.”