India's retail lending cycle gains pace with 11% mortgage gap: Report

Digital underwriting, rising incomes and financial inclusion are reshaping how Indians borrow, with lenders eyeing a multi-decade credit opportunity

India’s retail lending market is entering a long-term growth phase, with housing finance, vehicle loans, gold-backed credit and digital consumer lending emerging key drivers.

 

A combination of rising incomes, financial formalisation and technology-led credit assessment is expected to reshape how millions of Indians access loans over the coming years.

 

A report by Anand Rathi Advisors Limited (ARAL) titled “Retail Lending Reimagined” said India remains one of the fastest-growing retail lending markets globally, supported by low credit penetration across major segments and increasing adoption of digital lending platforms.

 

The opportunity is particularly significant in secured lending segments. India’s mortgage penetration stands at around 11 per cent of GDP, much lower than developed markets, leaving substantial room for housing credit expansion.

 

 

“India’s retail lending sector represents one of the most compelling opportunities within the country’s financial services ecosystem. Low credit penetration across key segments, combined with rapid digital adoption and increasing financial formalisation, creates a multi-decade growth runway,” said Samir Bahl, chief executive officer (CEO) – investment banking, Anand Rathi Advisors Limited.

 

Housing finance remains a key growth engine

 

Housing loans are expected to remain among the most attractive segments for lenders due to their secured nature and lower credit risk compared with unsecured lending.

 

India’s rising urbanisation, increasing aspirations for home ownership and demand for affordable housing are likely to support housing finance growth.

 

The report noted that digital underwriting models are making loan approvals faster by using alternative data sources and analytics to assess borrower profiles.

 

For borrowers, this shift could improve access to housing credit, especially for those who previously found it difficult to qualify through traditional lending processes. 

 

Vehicle loans get a boost from rising ownership demand

 

Vehicle finance is another segment expected to witness sustained growth. India’s growing middle class, rising personal mobility needs and increasing adoption of electric vehicles are supporting demand for vehicle loans.

 

The report highlighted that India’s vehicle loan market is growing at around 10-12 per cent annually, supported by passenger vehicles, commercial vehicles and used vehicle financing.

 

Non-banking financial companies (NBFCs) are expected to play a larger role in this space due to their ability to serve niche borrower segments and offer customised lending solutions.

 

Electric vehicle adoption could further create new opportunities as lenders develop specialised financing products for EV buyers.

 

Gold loans move towards formal channels

 

India has one of the world’s largest household gold holdings, but a significant portion of gold-backed borrowing has traditionally remained outside formal financial channels.

 

The report expects the gold loan market to expand from around $80 billion to $158 billion by FY31, driven by rising gold prices, greater awareness and migration from informal lenders to organised financial institutions.

 

Digital gold lending models are also changing the customer experience, allowing borrowers to access loans with quicker processing and better transparency.

 

Digital technology changes lending economics

 

Technology is becoming a major differentiator across retail lending businesses. Artificial intelligence (AI)-based underwriting, digital onboarding and data analytics are helping lenders evaluate borrowers more efficiently.

 

The growth of embedded finance — where lending products are integrated into digital platforms and customer journeys — is also expected to increase credit access.

 

Co-lending partnerships between banks, NBFCs and fintech platforms are likely to become more important as lenders look to expand distribution while managing risk.

   

Risks remain despite strong growth outlook

 

While the retail lending opportunity remains strong, lenders face challenges from interest rate movements, regulatory changes, asset quality concerns and collateral price fluctuations.

 

The Reserve Bank of India’s (RBI’s) increasing focus on responsible lending and risk management is expected to influence how lenders scale their businesses.

 

The report said companies with strong underwriting capabilities, technology-driven distribution and diversified funding sources are likely to emerge as long-term winners.

 

Atul Thakkar, executive director – investment banking, Anand Rathi Advisors Limited, said, “India’s retail lending market is entering a new phase of growth driven by structural demand across housing finance, vehicle finance, gold loans and digitally enabled consumer credit.”

 

What this means for borrowers

 

For consumers, the expansion of retail lending could mean easier access to credit, but responsible borrowing will remain important.

 

Borrowers should:

 

•      Compare interest rates and processing charges across lenders before taking loans.

 

•      Maintain a healthy credit score to access better loan terms.

 

•      Avoid excessive dependence on unsecured loans with high interest costs.

 

•      Check repayment capacity before increasing borrowing.

 

•      Prefer regulated lenders over informal credit sources.

 

India’s retail lending story is moving beyond traditional bank branches towards a technology-driven ecosystem.

 

With millions of households entering formal credit markets, the next phase of growth is likely to be shaped by lenders that can combine digital reach with disciplined risk assessment.