India's formal credit expansion is showing signs of fatigue as the number of over-leveraged borrowers hits 15% and new borrower growth moderates. Banks and lenders are increasingly relying on existing customers, signaling a shift in the retail lending landscape as the pool of new credit-eligible individuals shrinks.
The rapid expansion of India's formal credit system is encountering new challenges as the pace of growth in the borrower base cools down. According to a recent TransUnion CIBIL study, the share of credit-active consumers within the eligible population grew from 11% in 2017 to 28% by March 2026. However, the compound annual growth rate for this base has dropped to 9% in the 2024-2026 period, down from 14% recorded between 2017 and 2019.
Rise in Over-Leveraged Borrowers
A primary concern for financial institutions is the rise in over-leveraged consumers—individuals whose debt obligations may exceed their repayment capacity. The study indicates that the proportion of such borrowers climbed to 15% by FY26, following industry interventions, after peaking at 18% in FY24. This trend is particularly evident among younger borrowers, a segment that has been a major driver of recent retail credit demand.
Shift Toward Existing Borrowers
Lenders are finding it harder to bring new customers into the formal credit system. The contribution of 'new-to-credit' individuals to retail loan originations has fallen significantly, moving from 32% in 2017 to just 13% by 2026. This data suggests that the banking sector is increasingly focusing on existing clients to maintain credit growth rather than expanding its reach to previously untapped households.
Consumption-Driven Credit Demand
Borrowing patterns have undergone a notable change, with consumption-oriented credit products—such as personal loans, credit cards, and durable financing—becoming the primary choice for retail borrowers. The percentage of active borrowers using these products has jumped from 34% to 51%. This shift highlights a transition toward lifestyle-based borrowing, which can be more sensitive to economic cycles and interest rate fluctuations compared to secured loans.
Commercial and Regional Credit Trends
Commercial lending is also showing signs of contraction, with the share of credit-active enterprises dipping to 9% by March 2026. Furthermore, the number of new commercial borrowers entering the formal system has decreased, highlighting an untapped segment among MSMEs. Geographically, while growth has accelerated in states like Uttar Pradesh, Madhya Pradesh, and Bihar, this expansion into newer regions requires lenders to maintain strict underwriting standards to avoid potential asset quality issues. Despite these hurdles, the overall penetration of formal finance remains high, with 74% of credit-eligible Indians now having accessed formal credit at least once, compared to 35% in 2017.