Borrowers with small incomes are defaulting faster than before, and banks are under pressure.

Can a ₹20,000 personal loan really bring down a bank’s balance sheet? That question is no longer hypothetical. A sharp rise in bad loans has caught private banks by surprise, especially in the case of small-ticket unsecured credit and farm lending.

According to the Reserve Bank of India’s Financial Stability Report (FSR) released in June 2024, over 51.9% of new non-performing assets (NPAs) came from unsecured retail loans, including personal loans, credit cards, and microfinance. Most of these loans were given without collateral and are now becoming difficult to recover.

A New Problem From Old Segments

Bad loans are not new to Indian banks, but the source of stress has shifted. Instead of large industrial borrowers, the recent spike is mainly driven by smaller borrowers, individuals, farmers, and micro-entrepreneurs. Private banks that pushed aggressively into these segments are now seeing the side effects.

As per financial reports from the last quarter of 2024, bad loans in private banks increased. The total percentage of bad loans, known as gross NPAs (Non-Performing Assets), went up to between 1.42% and 4.7% of all the money these banks had given out as loans.

This is a worrying sign because in 2023, private banks were doing well. They had fewer bad loans and were known for keeping their loan books clean and healthy.

But now, even these banks are facing trouble, especially from unsecured loans like personal loans or credit card loans, where borrowers don’t have to give any collateral. Many people are not able to repay these loans on time, and this is adding to the banks’ bad loan burden.

Here’s a quick look at what the numbers reveal:

Period	Slippages from Unsecured Loans (% of Fresh NPAs)	Gross NPA Range (Private Banks)
September 2024	51.90%	—
Q4 2024	—	1.42% – 4.7%

The first table shows how large a portion of new bad loans comes from unsecured credit. The second column signals how overall defaults are rising among private players.

Agriculture: A Sector Under Pressure Again

While unsecured loans attract attention due to their fast growth, agriculture loans are also showing high stress. The Department of Financial Services Annual Report (2024–25) revealed that 6.2% of farm loans are now bad, nearly five times the rate in the retail sector, which stands at 1.2%.

Reasons range from unpredictable weather and rising input costs to delays in subsidy payments. Banks that gave loans under schemes like the Kisan Credit Card (KCC) are now facing difficulties in recovering their loans.

Here's a sector-wise breakdown:

Sector	Gross NPA Ratio
Agriculture	6.20%
Retail Loans	1.20%

This data shows how farm lending is becoming riskier even though it is treated as priority-sector credit.

Small Personal Loans Under Pressure as Repayments Fail

As part of financial inclusion, private banks and fintech targeted unsecured personal loans for salaried workers, small traders, and rural borrowers. This segment has shown strong growth over the last few years.

According to the RBI’s March 2024 Credit Growth Report, unsecured loans made up 25.3% of retail credit, not total bank credit. This includes microfinance, consumer durable loans, and small personal loans. While growth remained strong, it has slightly slowed from 25.5% in March 2023.

Lenders were confident, as digital processing reduced costs and helped expand into rural areas.

But now, cracks are visible. Many of these borrowers work in informal sectors, which are sensitive to inflation, elections, and crop failures.

Category	Share in Total Bank Credit
Unsecured Loans (Mar 2023)	25.50%
Unsecured Loans (Mar 2024)	25.30%

The data indicates that banks are still lending, but growth has slowed. And with over half of new NPAs coming from these accounts, the model is under review.

Policy Response: RBI Takes Action, With Mixed Signals

To control the rising number of bad loans, the Reserve Bank of India (RBI) took action in November 2024. It asked banks to keep more money aside (called higher risk weights) when giving unsecured personal loans, like small personal loans or credit card loans. This step made such loans more expensive for banks to give out, so they would be more careful about who they lend to.

Later, in June 2025, the RBI made another decision. It relaxed the lending rules for small finance banks, especially for loans under the priority sector (like farming, small businesses, or weaker sections). This gave those banks more freedom to choose where to lend.

With these two steps, the RBI is trying to find the right balance, making sure people still have access to loans, but also keeping the banking system safe from too many unpaid loans.

Here's a table summarising the timeline:

Date	Policy Action	Impact
Nov 2024	Risk weights on unsecured loans increased	Tighter credit norms, higher capital
Jun 2025	PSL norms eased for small finance banks	Lending flexibility improved

Conclusion

The government has promoted digital credit delivery through platforms like JanSamarth, especially for agriculture and priority-sector lending. This shows that the government’s push for digital agriculture lending is working. But the same platforms also raise concerns about credit quality when verification is weak or disbursements are rushed.

The RBI and public sector banks continue to support alternate recovery channels like Lok Adalats and compromise settlements, particularly for small-ticket loans. These methods help resolve NPAs without lengthy legal action.

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