By Anurag Mehra
Household borrowing in India is shifting from long-term bank loans to frequent, short-term digital credit, resulting in a household debt level of approximately 41.3 percent of GDP. The type of debt now prevalent is more troubling than the amount.
Where bank loans and regulated credit cards once dominated, borrowing is now split into many small, quick digital loans. This move to app-based microloans has created a hidden debt trap that often goes unnoticed by regulators, families, and even borrowers.
The New Face of Household Debt
Credit cards have long stood for easy consumer credit. Fast approvals, higher limits, and the option to pay only the “minimum due” made it easy to keep borrowing. Over time, this convenience can turn into a lasting financial burden, with interest costs that end up much higher than the original amount spent.
This risk has grown with the rise of app-based instant loans, Buy Now Pay Later (BNPL) offers, and fintech microcredit. Non-housing retail loans, including credit cards, personal loans, and consumer goods, now make up over 55 percent. Each loan may seem small, Rs 3,000 here, Rs 10,000 there, but their frequency, short terms, and high costs can trap people in a cycle of needing more credit.
Unlike single-bank loans, this debt is scattered across platforms. Multiple small loans can seem manageable individually, but become overwhelming when combined, making borrowers appear stable while they are actually under real stress. This scattered debt is key to India’s hidden trap.
Structural Gaps in the Current Lending Ecosystem
The main issue is not innovation itself, but rather the system that supports it.
First, over-lending is now more common. Lenders often rely on past credit scores instead of checking if borrowers can afford new loans today. People with good credit scores but lower incomes or tight budgets can still obtain new unsecured loans in minutes.
Second, delays in reporting have led to what is called “phantom debt.” The Reserve Bank of India has taken steps to improve credit reporting, but legacy structures, reporting lags, and implementation gaps continue to limit real-time visibility. Many borrowers take on loans that do not appear immediately in their credit reports, allowing them to borrow more than they can handle.
Third, recovery processes are still unbalanced. The Digital Lending Directions 2025 improved regulations, but enforcement is still uneven. The system focuses more on collecting debts quickly than on helping borrowers repay in a sustainable way. Protections for borrowers exist in theory, but weak enforcement lets problems grow until they become serious.
What Budget 2026 Can Do
Budget 2026 presents an opportunity to take decisive action without restricting access to credit. It can help balance growth with responsibility and long-term stability.
Prevent Over-Lending at the Source
To enhance borrower protection, Budget 2026 should require lenders to conduct comprehensive affordability checks, taking into account a borrower’s total debt and income, before granting new loans. It should set clear limits on the total amount of unsecured loans an individual can have across all platforms, ensuring people are not overwhelmed by excessive debt while still allowing access to needed credit.
Strengthen Credit Reporting and Transparency
To increase transparency, Budget 2026 should mandate real-time credit reporting for all digital loans, thereby preventing borrowers from taking on overlapping debts. It should also require lenders to present the total annual cost of borrowing, including all fees and penalties, in clear and standardized language, so borrowers fully understand their obligations.
Introduce Safeguards Against Excessive Pricing
Budget 2026 should comprehensively address unfair pricing by setting clear, enforceable caps on interest rates and fees for unsecured consumer loans, including credit cards, personal loans, BNPL, and app-based loans. This would protect borrowers from excessive charges while maintaining credit availability.
Fund the Enforcement of Digital Lending Rules
Budget 2026 should allocate funding to establish a centralised, technology-driven system for managing and resolving digital lending complaints. This system should track harassment and recovery complaints in real-time, ensuring that existing digital lending regulations are enforced effectively.
Incentivise Alternative Dispute Resolution
To resolve small loan defaults more effectively, Budget 2026 should encourage early mediation by offering incentives or regulatory relief to lenders that settle troubled loans through alternative dispute resolution mechanisms, rather than using harsh recovery tactics. It should also budget for independent debt counseling centers to support borrowers in distress.
A Budget for Second Chances
The idea of the “wilful defaulter” does not match today’s reality. Studies show that most people want to repay their loans, but the system prioritizes lending quickly and recovering anyhow over ensuring that people can repay.
Budget 2026 is a pivotal moment. By prioritizing credit health over mere growth, India can help households build resilience and achieve long-term stability. A system that values second chances protects borrowers and strengthens the foundation for sustainable growth.
(The author is Director at Expert Panel, which acts as a legal support system for loan resolution and protection from financial harassment)
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