How digital lending apps are pushing Indian consumers deeper into debt

India's household debt has climbed to a record level, with app-based lenders driving much of the growth through high-cost, short-term loans

By Andy Mukherjee

 

Indians are getting into debt like never before, with digital lenders originating four out of five personal loans. Both developments are troubling, but the sheer proliferation — and the outrageous usury — of smartphone-based borrowing platforms is the bigger headache.

 

Prime Minister Narendra Modi’s government recently caught a glimpse of youth frustration during widespread public anger over corruption in medical school entrance exams and shrinking formal jobs. But a bitter disappointment is also brewing among those who do find work, only to fall deeper in debt with every passing month. Faced with low wages and a rising cost of living, many are being tempted by lending apps to take on exorbitantly-priced new loans to meet interest payments on existing obligations.

 

 

Household debt ratios across emerging markets have largely plateaued post-Covid-19. In India, however, they have kept climbing, reaching a record 48 per cent of gross domestic product by December 2025, up from 38 per cent before the pandemic. The Reserve Bank of India’s latest financial stability report underscores the nature of this expansion: Non-housing credit accounts for nearly three-fifths of total household borrowing, with half driven purely by consumption.

 

To the extent that this borrowing reflects stagnant real incomes, there is no quick fix. Forget unsecured retail credit — even mortgage loans may come under pressure as artificial intelligence targets white-collar jobs. But with gross nonperforming assets across the banking sector at a multi-decade low of 1.8 per cent, formal lenders carry a thick capital cushion to absorb the credit costs.  

 

Lending apps, a $23 billion annual market that has expanded 2.5 times in three years, present a far more insidious problem. Thousands of digital loan originators prey on India’s working class — pinning them down with targeted ads and push notifications — to disburse small sums in three easy taps. Last fiscal year alone, fintech platforms sanctioned over 130 million such loans, averaging 16,000 rupees ($170). A majority of this credit is pushed to borrowers classified as medium- to high-risk. Yet under current rules, there are no legal limits on the number of loans an individual may carry, nor on the interest rates charged.

 

A recent study by Moneylife Foundation, a Mumbai-based non-profit, makes a compelling case for intervention. Analyzing records of distressed borrowers seeking debt resolution, it found that lending apps are destroying home finances in a manner traditional bank loans never did.

 

Although digital personal loans account for a small fraction of a household’s total principal debt, their aggressive schedules and opaque fee structures devour monthly cash flows. Lenders frequently deduct 10 per cent to 15 per cent processing fees upfront, transforming an advertised 36 per cent annual rate into a crushing burden. In extreme cases, daily rates compound to annual costs of 365 per cent or more.

 

Consequently, while formal bank loans represent the bulk of a family’s principal obligations, app-based credit routinely consumes 60 per cent or more of monthly debt service outlays. In 11 out of 13 Moneylife case studies, borrowers’ monthly instalments exceed their earnings, with the median debt-servicing ratio at 200 per cent of income. The economic strain is an early warning of a simmering socio-political crisis. Case records span a wide cross-section, from a math teacher earning $350 a month to a contract worker supporting a family of 13 on a third of that.  

 

Do these platforms expect someone making $4 a day to repay thousands of dollars in accumulated debt? Not really. The business model relies on serial refinancing — knowing an over-leveraged borrower will take out a second loan from a rival app to service the first. An ever-growing loop of fintech platforms trades cash flows amongst themselves while stacking 15 or 30 active loans onto a single balance sheet.

 

How to end this merry-go-round? The RBI has previously demonstrated a willingness to act, halting operations at individual lenders for charging “usurious” rates. But case-by-case enforcement is insufficient. Emulating regulators in the UK, Australia, and Indonesia, the central bank needs to enact an all-in annual cost ceiling that folds in processing fees, cap a household’s total exposure by limiting active digital loans, and enforce real-time credit bureau reporting.

 

Those are Moneylife’s recommendations to contain any further buildup. But to deal with the existing stress, an operational personal bankruptcy framework is essential. The mechanism for a legal clean slate already exists in the insolvency code, but it’s yet to be implemented.

 

A more fundamental shift will require channeling the aggression of fintech firms to the savings arena. Digitization of payments and credit has made them frictionless. Digital lending alone has captured roughly a third of all fintech venture and private equity capital raised in India over the past three years. But deposits, a heavily regulated product, remain under the control of a slothful banking system. “The myth is that the poor — being poor — cannot save,” notes M. S. Sriram, a professor at the Indian Institute of Management Bangalore. With innovative products, squirreling away small amounts from present cash flows could become as seamless as borrowing from the future.

 

Until the policy focus shifts toward building genuine household savings buffers, digital loans will remain less a tool for financial inclusion than a fast track to chronic debt. With social angst starting to spill over into the streets, those in government can’t afford to let policymakers look away.   

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper