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    Informal Credit in India

    Despite high bank account penetration in India, poor households are turning to informal credit due to limited formal access. Explore the reasons behind this shift, recent trends, risks of informal borrowing, and the need for inclusive credit policies for the unorganised sector.

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    Context

    • Despite nearly universal bank account penetration in India, fresh data (CMIE, Piramal Enterprises) show a sharp shift by poor households towards informal borrowing, due to limited access to formal credit Channels.

    About Informal Credit: What is it?

    • It is a type of credit that is credit from Non-Regulated entities like moneylenders, Pawnshops, friends/family, chit funds.
    • It typically lacks documentation or consumer protection.

    Why Informal Sector is more Vulnerable

    • Consuming households tend to be net savers, while the government, corporates and unincorporated enterprises are net debtors.
    • Competition for Funds - A major chunk of saving are held with banks, insurance companies, from which the net debtors borrow from.
    • When government borrows considerable sums to finance its deficits, it reduces the lending potential of financial institutions due to a smaller fund pool.
    • Hence, while the big corporates can still access capital from the remaining or through the bond/share market, the informal enterprises get left out.
    • Notably, informal sector does not have the resources required to access credit from diverse sources and is left to depend on extortionist money lenders.

    Recent trends and Shifts

    • 96% of Indian households have at least one bank account (NFHS-5, 2021).
    • Despite this, credit access remains skewed:
      • 4.2% fall in formal credit among poor households (CMIE 2023).
      • 5.8% rise in informal borrowing by those earning ₹1–2 lakh annually.
    • 75% of rural adults still rely on informal credit in some form (NABARD Financial Inclusion Survey, 2019).
    • ₹1.4 lakh crore was the estimated outstanding informal credit as of 2022 (CRISIL report).

    Implications

    • Banks and NBFC’S reluctant to lend to high-risk low-income groups.
    • Lack of documentation, collateral, or stable income proof blocks formal credit access.
    • Credit demand–supply mismatch: Formal sector unable to match localised, immediate lending needs.

    Way Forward

    • Given the anatomy of the private investments slowdown, a macroeconomic stimulus may not be the best policy choice.
    • Urgent fiscal deficit reduction, quick clean-up of the bad loans mess, and restoration of banks’ health are more likely to revive private investments.
    • The current credit policy seems skew in favour of the visible and large organised enterprises, which needs to be corrected.
    • Recognising the credit needs of the unorganised sector is hence crucial.
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