Rising Retail Loan Stress Raises Red Flags for India’s Consumer Economy

Even as India’s banking sector shows improving asset quality, reflected in a sharp decline in overall loan write-offs, early signs of stress are surfacing in the retail segment, signalling deeper unease in the consumer economy.

Indian banks, according to data tabled by the Ministry of Finance in Parliament on Monday, wrote off loans worth ₹1.72 lakh crore in 2024–25, down from a peak of ₹2.43 lakh crore in 2019–20. Over the 11-year period for which data was provided, cumulative write-offs across categories stood at ₹19.05 lakh crore.

However, retail loans accounted for a significant share of write-offs in the latest financial year, with public, private, foreign and small finance banks together writing off ₹45,404 crore. This was higher than write-offs in agriculture and allied activities at ₹21,882 crore, as well as in the industrial sector at ₹37,716 crore. Write-offs in the services sector stood at ₹38,438 crore, while those in the MSME segment amounted to ₹28,587 crore.

Write-offs are an accounting recognition that a loan is unlikely to be repaid. By writing off such loans, banks remove them from their asset books, effectively cleaning up their balance sheets.

“The slippage in the retail loan category is majorly due to a stress in the repayment of unsecured loans such as personal loans, consumer loans, and credit card loans,” says Jijith Raj, business head at Indel Money, an RBI-registered non-banking financial company.

Data from Paisabazaar, a digital loan and credit platform, points to shifting consumer patterns and rising aspirations that may be contributing to this increase in slippages. Its consumer insights survey last year found that vacations emerged as the leading reason for personal loans in the first half, accounting for 27% of loans taken. Home renovations followed at 24%, while 11% of borrowers took loans to repay credit card bills, with education trailing far behind.

Notably, unsecured retail loans have accounted for over 53% of total retail loan slippages as of September 2025. Private sector banks have been at the forefront of this stress, contributing nearly 76% of all unsecured retail loan slippages, reflecting higher delinquencies and write-offs compared to their public sector counterparts.

The RBI had anticipated these risks, moving early to tighten norms on unsecured lending with curbs imposed as far back as November 2023. Experts however, believe the rapid expansion in unsecured credit in the run-up to these measures, often accompanied by diluted underwriting standards, may have sown the seeds for a fresh build-up of non-performing assets.

Stressful Recovery

In a written reply to a question in the Lok Sabha, Minister of State for Finance Pankaj Chaudhary clarified that loan write-offs do not amount to a waiver of dues.

“The borrowers continue to be liable for repayment and banks continue to pursue recovery actions initiated in these accounts. Further, recovery in written-off loans is an ongoing process and banks continue pursuing their recovery actions initiated against borrowers under various recovery mechanisms available to them," said Chaudhary.

This means while write-offs may clean up bank balance sheets, the obligation for borrowers remains. And the borrowers have good reasons to oblige. “Unless and until the recovery is completed in good terms, it will tarnish the credit rating of the borrower. The borrower can be permanently barred from getting any loan from the formal banking system, which is an extremely difficult situation for a middle-class consumer. Can anyone imagine living without formal credit? So, everyone wants to settle things amicably and avoid unpleasant situation,” says Raj.

In August last year, the Finance Ministry informed Parliament that recoveries from written-off accounts have improved in recent years, rising from 19.1% in 2021–22 to 34.8% in 2024–25.

However, Raj cautions that, in the end, even though the recovery process may yield results, lenders could be forced to take substantial haircuts. “A major reason for this slippage is that such loans carry high interest rates. Mostly, these are consumption loans. If there is a shortfall in the personal income, primarily due to job losses or a slowdown in new job creation, or sluggish economic growth, it will affect the repayment of unsecured loans,” he adds.

Multiple indicators and reports by the International Labour Organization suggest that both job creation and real wage growth in India remain sluggish, even before the full impact of AI on the labour market has begun to play out.

“As the country keeps churning out roughly 8 million graduates per year with outdated skills, jobs become scarcer and real wages keep compressing,” note analysts at Marcellus Investment Managers in their assessment of the RBI’s Financial Stability Report. “Furthermore, the availability of easy credit and the access to information on others living a ‘better life’ has led to an adverse behavioural change, which is often sticky and takes time to unwind.”

This suggests that aspirations are rising far faster than incomes in India, with the gap increasingly surfacing as stress in the retail loan segment of the banking system. In this backdrop, experts see a larger role for the RBI and lenders in tightening oversight and managing risks associated with unsecured lending going forward.

Retail Risk

The RBI’s transition matrix for different borrower classes indicates that the overall probability of a downshift in credit scores, especially for borrowers with moderate scores, is now higher than before.

For context, about 44% of total borrowers fall in the near-prime or subprime categories, making them relatively more vulnerable to default than those classified as prime and above.

Beyond the RBI’s option to further raise risk weights on unsecured loans, making such credit costlier for lenders and borrowers, experts say the onus is also on lenders to tighten their own practices. Indel Money’s Raj suggests that lenders “may reserve unsecured loan products only for prime customers.”

This could also nudge lenders to shift towards secured products in place of unsecured loans. The latest data show that gold loans have emerged as the second-largest retail loan category, overtaking personal loans in the December quarter of the current fiscal year, reflecting the impact of the RBI’s earlier measures.

While there appears to be sufficient headroom for the regulator to take further steps to contain credit risks, economists argue rising geopolitical tensions could stoke retail inflation in the near term, potentially acting as a dampener for the RBI’s policy actions.