Why Unsecured Credit Is Turning Into India’s Most Default-Prone Loan Segment

India’s retail credit ecosystem is witnessing mounting stress as unsecured lending products increasingly account for repayment failures. Personal loans and credit cards, which do not require any collateral, are seeing higher delinquency levels compared to secured credit. 

According to the Reserve Bank of India’s Financial Stability Report, December 2023, Issue No. 28, released on December 28, 2023, younger borrowers and digital lending expansion have emerged as key risk factors. 

Easy approvals, instant disbursals, and flexible end use have made unsecured credit popular, particularly among first-time borrowers in tier-2 cities and rural regions where income stability remains uneven. This growing trend has placed unsecured credit firmly in focus as the Riskiest loan in India.

Unsecured Loans Dominate Retail Defaults

The RBI’s December 2023 Financial Stability Report notes that unsecured retail loans account for 53.1 percent of total retail loan defaults across scheduled commercial banks, highlighting the scale of risk involved

Private sector banks face disproportionate exposure. RBI data cited in multiple reports shows that 76 percent of total loan defaults at private banks originate from unsecured loans, while the comparable figure for public sector banks is significantly lower at 15.9 percent

At a system-wide level, the gross non-performing asset ratio for unsecured loans stands at around 1.8 percent, reinforcing concerns about rising vulnerability in this segment

Share Of Unsecured Loans In Retail Defaults

These trends underline why unsecured lending continues to be viewed as the Riskiest loan in India by regulators and lenders alike.

The popularity of unsecured loans stems from minimal documentation and faster processing. However, the absence of collateral increases default probability during income shocks, making them the Riskiest loan in India from a financial stability standpoint.

Young Borrowers And Fintech Lending Intensify Risk

The RBI report further highlights that borrowers below 25 years of age exhibit the highest default risk, largely due to limited credit history and unstable income streams. Stress levels are reported to be higher in tier-2 cities and rural regions, where employment is often informal

Fintech lenders have significantly expanded access to unsecured credit. As per RBI observations, over 70 percent of fintech loan books consist of unsecured loans, and more than half of these loans are extended to borrowers below 35 years of age

This aggressive expansion has improved financial inclusion but also accelerated repayment stress. LoansJagat, in its analysis of unsecured borrowing trends, notes that defaults on personal loans and credit cards are rising in several regions, particularly among high-risk borrower segments, reflecting growing stress in consumer credit portfolios and the challenges of overlapping credit exposure.

Together, these factors have strengthened the perception of unsecured credit as the Riskiest loan in India, especially among young urban and semi-urban borrowers.

Borrower And Lender Risk Indicators
 

Together, these indicators reinforce the growing consensus that unsecured credit remains the Riskiest loan in India, particularly among younger borrowers.

Regulatory And Industry Response

In response to rising risks, the RBI has cautioned banks and non-banking lenders to moderate unsecured credit growth and strengthen underwriting standards. 

Industry leaders quoted in Indian media reports have acknowledged the pressure, with several private banks tightening credit score thresholds and reducing exposure to high-risk borrower segments.

Conclusion

Unsecured loans offer convenience but carry heightened risk. Stronger credit discipline by lenders and cautious borrowing behaviour will be critical to preventing further stress in the system.