India’s Credit Puzzle Still Has Missing Pieces With Bank Accounts Open, But Borrowers Still Knock on the Moneylender’s Door

Unknown Apr 02, 2026 1,000 Views

India’s financial inclusion journey has made remarkable strides over the past decade, with over 55 crore Jan Dhan accounts opened and digital transactions surging. Yet, a troubling paradox persists: while formal banking access has grown, informal borrowing remains dominant, especially among...

The Credit Divide: Key Findings

Informal loans are 2.6x more common than formal credit among low-income households
Formal borrowing fell by 4.2% annually (FY19–FY23) among poor families, while informal borrowing rose by 5.8%
Self-employed entrepreneurs relying on informal credit grew at 13% annually, compared to 8% growth in formal borrowing
Over 50% of registered MSMEs lack access to institutional credit, forcing them into high-cost, unregulated lending

Regional Disparities in Credit Access

Southern and Western states (Kerala, Tamil Nadu, Maharashtra, Gujarat) show higher formal credit penetration
Northern and Eastern states (Bihar, Jharkhand, West Bengal, UP) still rely heavily on informal lenders
Daily-wage workers and small business owners are disproportionately excluded from formal credit channels

Why Formal Credit Isn’t Replacing Informal Lending

Lack of stable income, collateral, and credit history keeps many borrowers outside the formal system
Banks and NBFCs remain risk-averse, especially post-COVID, pushing borrowers toward moneylenders and chit funds
NBFCs and microfinance institutions play a vital role but face regulatory and funding constraints

Policy Recommendations to Bridge the Gap