Financial inclusion fails to curb informal borrowing in India
Almost every Indian household had a bank account by 2021, but for many low-income families, getting an actual loan from a bank is still out of reach.
Instead, more people are borrowing from informal lenders—highlighting that just having a bank account doesn't mean you can easily access credit.
Formal borrowing down, informal loans up
Between 2018 and 2023, formal borrowing dropped by 4.2% among families earning under ₹2 lakh.
In the same period, informal loans grew by 5.8% for families earning ₹1-2 lakh and by 12.6% for those earning ₹2-5 lakh—mainly because banks want steady jobs and paperwork most low-income folks don't have.
How the situation changed
With more people in unstable or farm work needing cash, banks pulled back on lending.
Many had no choice but to turn to moneylenders charging steep interest rates of up to 50%.
Debt distress is rising
Microfinance loan defaults doubled from late 2022 to early 2025 (from 1.8% overdue to 3.6%), showing growing debt stress.
High-interest informal loans and little regulation often trap borrowers in debt cycles—even if they technically have access to banking.