India’s loan default rate has ticked upward in the first quarter of FY26 (April–June 2025), signaling growing financial stress among borrowers — especially in the personal loan and MSME segments.
While the overall economy remains strong, rising household debt, job market pressure, and higher borrowing costs are starting to show cracks in the repayment ecosystem.
1. The Numbers Tell the Story
According to recent data from credit bureaus and financial regulators:
Gross NPAs (Non-Performing Assets) for scheduled commercial banks rose to 3.4% in Q1 FY26, up from 3.1% in Q4 FY25.
Retail loan delinquencies (90+ day overdue accounts) climbed to 1.8%, the highest in nearly two years.
MSME loan defaults saw the steepest increase, touching 6.7%, as small businesses struggled with liquidity and delayed payments.
The pattern is clear: while lending has expanded, repayment capacity hasn’t kept pace.
2. Personal Loans Lead the Default Surge
The personal loan segment, which has grown rapidly post-pandemic, is now showing signs of strain.
Analysts attribute the rise in defaults to:
Aggressive lending by fintechs and NBFCs to new-to-credit customers
Higher EMIs after consecutive repo rate hikes
Job instability in IT, startups, and gig sectors
Younger borrowers, particularly under 35, form a large share of the newly stressed accounts.
3. MSMEs Under Pressure
Micro, Small, and Medium Enterprises (MSMEs) — the backbone of India’s economy — are facing a liquidity crunch.
Delayed payments from large corporates, rising raw material costs, and muted export demand have strained cash flows.
Banks report that small-ticket working capital loans (₹10–50 lakh range) are at the highest risk of slippage.
4. Credit Cards and Consumer Loans Also Feel the Heat
The boom in credit card spending and buy-now-pay-later (BNPL) schemes during 2024–25 is now leading to repayment fatigue.
Default rates on unsecured consumer credit have climbed to 2.4%, with lenders tightening their approval norms in response.
5. What’s Driving the Spike in Defaults?
The rise in defaults isn’t a sign of crisis yet, but several structural factors are converging:
| Key Factor | Impact on Borrowers |
|---|---|
| High interest rates | Larger EMIs, lower affordability |
| Stagnant income growth | Pressure on household budgets |
| Overleveraging | Multiple personal loans and credit cards |
| Delayed MSME payments | Liquidity crunch in small businesses |
| Aggressive digital lending | Borrowers with weak credit profiles entering the system |
6. What It Means for Borrowers and Banks
For Borrowers: Missed payments can severely dent credit scores, making future loans costlier. Borrowers should focus on debt consolidation and timely EMI management.
For Banks: The RBI has already advised lenders to tighten risk checks and improve early warning systems for unsecured loans.
Experts believe that while the situation is manageable, banks must balance growth with prudence to avoid a repeat of past NPA cycles.
Expert View
Economists say this is a “soft stress cycle”, not a systemic risk:
“We’re seeing temporary stress in retail and MSME credit, but India’s banking system remains resilient with adequate provisioning,” said a senior analyst at CRISIL.
However, they caution that any further slowdown in consumption or job creation could extend the pain into FY27.
❓ FAQs
Q1. Which loan types are seeing the highest defaults?
MSME and unsecured personal loans currently have the highest default rates in Q1 FY26.
Q2. Are large banks affected?
Private and PSU banks are largely stable, though smaller NBFCs and fintech lenders face higher stress.
Q3. Will RBI intervene?
The RBI has already tightened lending norms for unsecured credit and is monitoring delinquency data closely.
Q4. How can borrowers protect their credit score?
Pay EMIs on time, avoid taking multiple loans simultaneously, and keep credit utilization below 40%.
Q5. Is this similar to the NPA crisis of the past?
No. This is more of a consumer-level repayment stress, unlike the corporate NPA wave of 2015–2018.
Published on : 24th October
Published by : SMITA
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