Why in news?
Despite almost universal bank account ownership, new data from CMIE and Piramal Enterprises show that poor households increasingly rely on informal lenders such as moneylenders, pawnbrokers and chit funds, revealing gaps in formal credit access.
What is informal credit?
- Non‑regulated lenders: Moneylenders, pawnshops, friends and family, chit funds and local landlords who provide loans without formal documentation.
- Characteristics: Loans often carry high interest rates (sometimes 36–50 %), require personal guarantees or collateral (gold, land papers) and lack consumer protection.
Recent trends and shifts
- Bank penetration high: About 96 % of households have at least one bank account (NFHS‑5, 2021), yet credit access remains skewed.
- Declining formal credit: Among poor households, formal credit fell by 4.2 % (CMIE 2023) while informal borrowing rose 5.8 % for those earning ₹1–2 lakh annually.
- Rural reliance: Around 75 % of rural adults use some form of informal credit (NABARD Financial Inclusion Survey 2019).
- Large informal market: The outstanding informal credit was estimated at ₹1.4 lakh crore in 2022 (CRISIL report).
Implications
- High risk for borrowers: Without regulatory oversight, borrowers face exploitation, debt cycles and loss of assets.
- Banks’ reluctance: Formal institutions remain reluctant to lend to low‑income groups due to lack of collateral, stable income and credit history.
- Demand–supply mismatch: Informal lenders meet immediate, localised credit needs that formal banks find costly to service.
Way forward
- Strengthen microfinance and self‑help group lending with fair interest caps.
- Expand credit information bureaus to include informal repayment histories, enabling formal lenders to assess risk.
- Promote digital lending platforms with simplified know‑your‑customer (KYC) norms while ensuring data protection.
- Increase financial literacy so that households understand loan terms and consequences.