The focus of these age groups on experiential spending, such as travel, combined with limited credit history and economic uncertainties, heightens the risk of defaults. Read to find out what data says on credit surges and strategies to prevent defaults.
Retail loans have seen a sharp rise among India’s Gen Z and Millennial populations. Individuals in this age group are increasingly drawn to unsecured lending options, extended by NBFCs and other financing options since they offer quick loans and easy access to credit.
These demographics are now among the leading borrowers in the unsecured credit market. RBI has time and tightened the noose around the unchecked rise in small-ticket size loans which contribute towards defaults.
India has the world’s largest young population of 254 million people aged between 15 and 24. It is no surprise that the country is witnessing a surge in retail loans among borrowers who are new to the credit market.
According to a report by TransUnion CIBIL, approximately 99 million consumers opened their first credit product in 2023-24 and became New-to-Credit (NTC) consumers. Millennials, those born between 1980 and 1994, made up the largest segment of new borrowers at 35 per cent, followed closely by Gen Z (born in 1995 and later) at 22 per cent. The report also notes that around 48 per cent of first-time borrowers open their second credit product within a year.
What the data reflects is the fact that this demographic has embraced loans, credit cards, and BPNL (Buy Now Pay Later) services to meet their needs.
Consecutively, credit card spending has also surged reaching an all-time high of Rs 1.72 trillion on October 2023. However, with increased usage comes more chances of defaults.
Another data from TransUnion CIBIL shows that credit card defaults increased from 1.7 per cent at the end of 2023 to 1.8 per cent in the first half of this year. While the number may seem marginal, it shows that the outstanding credit card dues ballooned to Rs 2.7 trillion by mid-2044, a steep rise from Rs 2.6 trillion in March and just over Rs 2 trillion in March 2023.
Many factors have contributed to the rise of retail loans among Gen Z and Millennials. The rapid adoption of digital-first financial services, user-friendly loan apps, and minimal paperwork have made it way easier for young borrowers to get hold of quick credit.
For instance, the festival season is just around the corner with attractive deals and online sales that span for a few days. The younger cohort may get trapped into the ‘fear of missing out’ (FOMO) mindset and make purchases on credit.
Much of such spending is done on credit rather than cash or money available at hand. However easy access to credit comes with great risks, especially when it leads to over-borrowing and financial mismanagement.
Says Rishabh Goel, Co-founder & CEO, Credgenics, a debt resolution platform, “The rise in loan defaults among Gen Z and Millennials is largely due to their lack of financial literacy, unplanned spending and inadequate financial planning which makes it harder for them to manage loans effectively.”
He adds, “Their focus on experiential spending, such as travel, combined with limited credit history and economic uncertainties, further heightens the risk of defaults. The easy access to multiple debt sources, like credit cards and BNPL schemes, also contributes to their financial struggles.”
1. Budget Borrowing: First and foremost, you should understand your income and expenses before taking a loan. For instance, if your salary in hand is not more than Rs 80,000, would it make sense for you to take a loan (or multiple loans) that makes an EMI/repayment amount totaling above or around Rs 50,000? Budget borrowing means loaning such an amount that you can comfortably repay without bending backwards or sacrificing basic needs.
2. Avoid Multiple Loans: Remember the more you borrow the more you repay. Juggling multiple loans or credit cards can lead to a debt trap. It is always better to limit borrowing before you have paid off any existing debt.
3. Emergency Savings: Keeping an emergency fund is a must. This would help young borrowers manage unexpected financial challenges, reducing the chances of defaults when unforeseen expenses knock at your door.
4. Timely Repayment: Defaults in some cases can incur late fees and penalties as well as damage your credit score. To prevent this from happening, you can set up reminders and automate payments to ensure timely repayments.
5. Limit Credit Card Usage: Though credit cards offer convenience, one should use them with an eye of caution. Especially young borrowers who are hoarded by online marketing gimmicks of ‘flash sales’ should aim to keep their credit utilisation below 30 per cent and pay off balances in each full month to avoid high interest rates.
“Enhancing financial literacy is essential,” says Goel as “many young borrowers lack a deep understanding of debt management and the implications of getting into a debt trap”.
He suggests a gradual lending approach, where borrowers start with smaller loans and qualify for larger ones based on their repayment behaviour which can help mitigate risk while nurturing responsible financial habits.
A disciplined approach can take young borrowers a long way. While retail loans offer Gen Z and Millennials the financial flexibility to get easy credit, the rise in defaults points to the need to impart better financial literacy and responsible borrowing practices among this demographic.