Over 55% of daily wagers still rely on informal lenders instead of banks: Report
The report titled "Prevalence of Non-Institutional Borrowing Among Indian Households" describes the extent to which informal credit exists, especially for those earning below Rs 2 lakh a year.
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12:24 PM IST
India may have come a long way in financial inclusion—think Jan Dhan accounts, Aadhaar, UPI—but for millions of daily wage earners, local moneylenders and shopkeepers remain the go-to for loans.
A recent report from Piramal Enterprises raises an essential issue. More than half of India's low-income households are still dependent on informal borrowing, with formal channels gradually opening up for an increasing number of people. The report titled "Prevalence of Non-Institutional Borrowing Among Indian Households" describes the extent to which informal credit exists, especially for those earning below Rs 2 lakh a year.
“India’s financial inclusion story has delivered impressive gains in access, but the next chapter must focus on usage—especially timely, affordable, and appropriate credit,” said Debopam Chaudhuri, Chief Economist at Piramal Enterprises.
“For millions of informal workers, small entrepreneurs, and rural households, NBFCs are the only bridge to formal finance. Strengthening them is essential to close the credit gap," he noted.
The informal trap
The numbers show a big gap. In 2021, people in India borrowed from informal sources like moneylenders 2.63 times more than they did from banks or other formal lenders. In comparison, the number is much lower in Brazil (0.6 times) and the US (0.27 times). Among low-income families, borrowing from informal sources has been growing by 5.8 per cent every year, while loans from banks and formal sources have dropped by 4.2 per cent between 2019 and 2023.
Just for instance, high-income households indicated by diminished credit dependence have a bigger cushion. But for the poor, these unregulated, costly loans may be the lone lifeline, with affiliated risks.
Also Read:Having a good credit score and still not getting a loan? Here are 5 reasons for denial
COVID made it worse
The pandemic drove more people into informal jobs and rural livelihoods. As banks became wary of defaults, households turned to non-institutional credit. The report revealed that more than 55cper cet of daily wagers currently have informal loans running.
State-level disparities also stand out. Southern states like Kerala, Tamil Nadu, and Karnataka have stronger formal credit networks—thanks to gold loans and fintech penetration. But in Bihar, Jharkhand, and West Bengal, over 57 per cent of households still borrow informally.
Punjab, once seen as relatively better-off, is now showing signs of financial stress with rising informal lending.
NBFCs and MFIs: India’s credit backbone?
NBFCs and microfinance institutions are trying to bridge the gap. They serve remote towns and rural markets with nimble, community-based lending. But they’re hitting a wall. “NBFCs are critical to financial delivery but they need support,” Chaudhuri notes.
The report urges policy measures such as a dedicated refinance window, liquidity access, lowering the SARFAESI loan recovery threshold to Rs 1 lakh, and even allowing well-governed NBFCs to take deposits. These steps could help bring more borrowers into the formal fold and reduce reliance on high-risk, informal credit channels.
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