India’s Poorest Rely on Informal Credit

• Despite the Union government’s financial inclusion program, 96% of India’s population has access to a bank account.
• A significant portion of India’s poor and low-income households are increasingly using informal and more expensive borrowing sources.
• Loan defaults are increasing among microfinance loans, which are a proxy for non-institutional credit.
• Despite progress in financial inclusion, progress has been limited to the liability side of lenders, such as deposit opening.
• Between 2018-19 and 2022-23, the number of borrowers from economically weaker sections of society who borrowed from formal channels contracted by 4.2%.
• However, households borrowing from informal or non-institutional sources of credit saw a growth of 5.8%.