Loan defaults in India have surged to a six-quarter high, with Tier 3 towns and beyond facing the sharpest rise. According to a new report by the Fintech Association for Consumer Empowerment (FACE), loans overdue by more than 90 days stood at 3.6% in March 2025, up from 3.3% a year earlier. Fintech Association for Consumer Empowerment (FACE) is the RBI-recognised Self-regulatory Organisation in the FinTech Sector (SRO-FT).
This surge in delinquencies is being driven by a troubling combination: easy access to small-ticket loans, an influx of first-time borrowers, and limited credit awareness, particularly in non-metro regions.
Delinquencies higher in Tier 3 cities and rural India
Defaults are most pronounced in Tier 3 towns, where the delinquency rate has climbed to 4.2%, closely followed by rural areas at 4.1%, as per the FACE report. Younger borrowers, especially those under 25, are among the hardest hit. Many of them have little to no credit history and are often taking loans without a proper repayment plan in place.
“Small-ticket loans, often below Rs 10,000, are being used without a clear repayment plan or financial cushion in place,” said Rishabh Goel, Co-founder & CEO of Credgenics. “Younger borrowers, particularly those under 25, are among the most affected, with the highest rate of missed repayments.”
Easy credit access raises risks for new borrowers
Goel pointed out that while the rise of digital lending has helped expand credit access in underserved areas, it must go hand in hand with “responsible borrowing and lending”. As defaults rise, lenders are expected to become more cautious. “We may see more thorough checks before loans are approved, including better assessment of income stability and repayment capacity,” he said.
Credit card NPAs on the rise too
The impact isn’t limited to small personal loans—credit card defaults are rising too. RBI data shows unpaid credit card dues surged by 28.4% year-on-year, reaching Rs 6,742 crore by December 2024. Consequently, gross NPAs in the credit card segment have increased to 2.3% of total dues, up from 2.06% a year earlier.
Aggressive lending, particularly of unsecured credit in semi-urban and rural markets, is contributing to borrower stress. In many cases, users may be juggling multiple loans or relying on short-term income sources, increasing their vulnerability to missed payments.
Time to recalibrate lending strategy
“For the industry, this is a moment to reflect and recalibrate,” Goel said. “Responsible lending practices, stronger underwriting, and extensive borrower education are key priorities moving forward.”
He also emphasised the importance of financial discipline among borrowers. “Avoiding multiple loans, paying EMIs on time, and maintaining a good credit score are critical to future financial access.”
Recommendations to tackle the default surge
To reduce the risk of over-borrowing and defaults, industry experts recommend:
-Longer repayment periods to ease monthly EMI burden
-Leveraging local-level data for smarter underwriting
-Using technology to improve collections
-Driving awareness among borrowers about credit discipline
The Reserve Bank of India has already tightened norms for unsecured loans to contain rising risks.
Credit deepening must come with caution
As India’s credit landscape deepens into smaller towns and rural belts, both lenders and borrowers need to proceed with caution. Ensuring that financial inclusion doesn’t come at the cost of growing defaults will be critical for long-term economic stability.