Today’s youth are more self-reliant, ambitious, and digitally capable than ever before. But a new challenge is emerging on the path of this self-reliance — increasing defaults on small loans. Especially those personal loans which are less than Rs 50,000 are rapidly reaching the category of non-performing assets (NPAs), according to a report.
Recently, data shared by CRIF and the Digital Lenders Association of India (DLAI) has revealed a worrying picture. According to them, about one in every four loans less than Rs 50,000 has not been repaid on time. That is, 26% of the loans are such which are due for 90 days or more.
Defaults are highest on loans less than Rs 10,000
The most shocking thing is that the percentage of defaults has been the highest on loans less than Rs 10,000. These loans were given between December 2023 and June 2024, data for the second quarter of FY 2025 showed.
When the NPA rate of small loans was 13.9% in the year 2019, no one had any idea that this figure would double in the next few years. But by July 2023, it increased to 26.2%. Even loans up to Rs 1 lakh have registered an increase in the NPA rate, which increased from 12.4% to 14.4%.
The specialty of these loans is that they are mostly distributed by NBFCs (non-banking financial companies), experts are of the view. These companies are targeting those areas which were still outside the traditional banking system – such as small cities, towns and villages, they noted. These loans, which are available without much paperwork through digital loan apps, may have become convenient for the youth, but now this facility is turning into a financial burden, experts said.
As Per RBI’s report, during the first six months of 2024-25, the share of stressed microfinance assets increased, with loans where repayments are overdue between 31 and 180 days rising from 2.15% in March to 4.3% in September. Moreover, stress remained high among borrowers who had taken loans from multiple lenders and those with higher outstanding loans.
Factors that have led to the rise of defaults among GenZ
On this worrying trend, Rishabh Goel, Co-founder & CEO, Credgenics, says, “The rise in loan and credit card defaults among Gen Z in India can be attributed to a combination of behavioural trends, economic pressures and systemic gaps in financial education.”
One of the primary factors is the increasing tendency among young consumers to indulge in lifestyle-driven, aspirational spending, heavily influenced by social media and the growing e-commerce ecosystem, he noted.
Goel is of the view that easy access to credit through fintech platforms, BNPL services, and relaxed lending norms by private banks has enabled Gen Z to borrow with minimal scrutiny, often without a clear understanding of repayment obligations.
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Among several other reasons, Goel said that many in this demographic also work in the gig economy or informal sectors, resulting in irregular income that cannot always sustain recurring EMIs or credit card bills. Compounding the issue is a lack of financial literacy, as many young borrowers are unaware of how interest rates, late fees, and credit scores function, leading to poor credit discipline, he explained.
“The inadequate credit risk assessment by lenders eager to aggressively tap into this growing digital-first segment has further aggravated the situation,” he further said.
Steps to be taken to avoid such defaults
“As stewards of financial stability, we must adopt a proactive and holistic approach to mitigate this risk. First, there is an urgent need to embed financial education across the educational journey, empowering the next generation with the tools to understand credit, manage debt and build financial resilience while avoiding debt traps,” says Goel.
Second, he believes, there is a need to have evolved lending practices to be more responsible and data-driven, ensuring that credit lines are aligned with genuine repayment capacity, not just digital footprints. Regulatory bodies, financial institutions, and fintech players must collaborate to bring greater transparency to credit and penalty terms, especially in the burgeoning BNPL segment, he noted.
“Additionally, we must promote a culture of savings, encourage the building of emergency funds, and support innovations that foster sound financial planning and management. This calls for innovation with responsibility since the long-term health of our economy depends on the financial wellbeing of its youngest participants. By acting decisively today, we can transform this challenge into an opportunity to build a more financially aware, resilient, and empowered generation,” Goel emphasised.