Low-Income Household Credit: Reform Ideas for Banks, NBFCs and PSL
Why in the news
India’s last-mile credit network is strong, but shocks across 15 years, from the Andhra Pradesh crisis (2010) to demonetisation (2016), Covid-19 (2020) and the slowdown since early 2024, triggered abrupt credit cuts. The aim now is steady access to formal credit.
Key facts
- Players: universal banks, small finance banks (SFBs), NBFCs and fintechs, joined by co-lending, direct assignments, lending service providers and business correspondents.
- Debt level: household debt is 42% of GDP.
Proposed reforms
| Area | Problem | Suggestion |
|---|---|---|
| Bank-NBFC rules and PSL | SFBs cannot co-lend; upfront income recognition only for DA; default guarantees only in co-lending | Watch total bank exposure to non-banks; originators hold adequate capital; raise PSL weightage for underserved segments and districts |
| Funding | Over-reliance on bank funding makes credit stop suddenly | Deepen NBFC capital market access; market-making for NBFC bonds and securitised paper |
| Lender caps | A three-lender limit is too blunt and excludes entrepreneurial households | Use income proxies, occupation types and field-staff insight; RBI technical committee standards; MoSPI household income survey for benchmarking |
Rationale
- Leverage worries are tempered by the low debt ratio.
- Informal borrowing persists and universal banks struggle with PSL targets.
- Aligned rules, varied funding and credible income checks can smooth credit and cut boom-bust cycles.
Exam angle
- Term: Priority Sector Lending (PSL); household debt-to-GDP: 42%.