The Hidden Problem with India's Credit Boom: Why First-Time Borrowers Are Disappearing

SYNOPSIS

The Reserve Bank of India's decision to increase the repo rate by 25 bps to 5.5% marks a significant turn toward monetary tightening after nearly four years of rate stability. Driven by persistent retail inflation, global rate adjustments, and rising input costs, the shift to 'calibrated tightening' increases borrowing costs for home loan borrowers and businesses while boosting prospective yields for fixed-deposit savers. This shift highlights the delicate balance between reining in price pressures and maintaining sustainable economic growth.

A single interest rate decision can alter millions of household budgets overnight. With the Reserve Bank of India raising the repo rate to 5.5%, the financial landscape is shifting—changing the math for both borrowers and savers.

Before modern digital banking, getting a formal loan in India was incredibly difficult for ordinary people. Banks demanded high value property or land as collateral, which most families did not own or have clear titles for. They also required massive amounts of paperwork like salary slips and tax returns, which informal workers earning cash simply could not provide. Finally, anyone who had never borrowed from a bank before had no official credit history, creating a trap where you needed a loan to prove you were trustworthy, but couldn't get one without prior history.

Traditional banks preferred large, high-ticket corporate loans to minimize their administrative costs. Which was not always an option due to struggle involved.

Leading rise of Non Banking Financial Companies (NBFCs) . NBFCs are actually a heterogeneous group providing several services extending from micro finance to insurance. They provide insurance, gives MFI loans, infrastructure financing etc.

NBFCs opened formal credit to millions of ordinary Indians by throwing out the rigid rules of traditional banks.

The FIDC–TransUnion CIBIL report Bharat Nirman: NBFC Forming the Foundation of Credit Dispersion reveals an important trend in India’s credit market. Between June 2016 and June 2026, the share of new to credit consumer loans in India that were originated by NBFCs increased from 24% to 47%. Their role in bringing people with no previous formal credit history into the credit system has therefore grown significantly.

However, another figure tells a different story. During the same period, first time borrowers’ share of all NBFC loan originations fell from 28% to 16%. In simple terms, people taking their first formal loan accounted for a smaller proportion of the loans given by NBFCs in 2026 than they did in 2016.

But, How can NBFCs be playing a bigger role in bringing first time borrowers into the credit system while first-time borrowers make up a smaller share of NBFC lending?

The first figure, which rose from 24% to 47%, looks at the entire market for loans given to new to credit consumers and measures how much of that market belongs to NBFCs. The second figure, which fell from 28% to 16%, looks only at NBFCs’ lending and measures how much of it goes to first-time borrowers.

This distinction is important because the figures do not prove that the number of first-time borrowers has fallen or that NBFCs are deliberately moving away from them. Instead, they show that first time borrowers make up a smaller share of NBFCs’ overall lending, even as NBFCs have become more important in serving new to credit consumers.

The bigger question, therefore, is what is driving this change. Are NBFCs lending more to customers who already have credit histories? Are borrowers’ needs changing as access to credit expands?

One possibility is the growing pool of existing borrowers is repeated lending and changing consumer credit needs. As more people enter the formal credit system NBFCs may increasingly serve customers who already have credit histories and return for additional loans. At the same time, the growing availability of buy now pay later (BNPL) and EMI options ease money spending habits. Specially for younger consumers, particularly Gen Z, these short term credits can help finance not only basic needs but also luxury choices, from latest smartphones and fancy holidays to concert tickets . Looking at spending habits and ease of payment options this might sometimes pile up to huge credits. This does not mean that Gen Z's spending habits are responsible for the decline in first time borrowers' share the report does not establish such a link. Rather, it highlights a major shift in how credit may be used and why borrowers may return to lenders for further financing.

The current loan boom in India is a dilemma. On the surface, the figures show a level of financial inclusion never seen before. However, a closer inspection reveals the "hidden problem" the pipeline of new borrowers is getting smaller. NBFCs are creating a society that is highly dependent on the quick satisfaction habits. behaviors of GeN Z, who increasingly use BNPL and EMI options to finance LUXURY lifestyle choices like concert tickets and vacations. Repeatedly lending to this current, digitally trackable pool is far safer and more profitable for lenders than taking a chance on  no credit  data  customer.

Making all sense for exactly why first-time borrowers are disappearing.

Saachi Bhavasar