Financial distress often begins long before defaults, with rising EMI burdens and dependence on credit for everyday expenses emerging as key warning signs.
India's consumer credit market has expanded rapidly over the past decade, making loans, credit cards and buy-now-pay-later products more accessible than ever before. But alongside this growth, financial experts are seeing a worrying trend: an increasing number of borrowers are using fresh loans to service existing debt, creating a cycle that can quickly spiral into a debt trap.
According to Ritesh Srivastava, Founder and CEO of debt resolution platform FREED, the warning signs of financial distress often appear long before borrowers begin receiving collection calls.
"The numbers usually start telling the story before the harassment calls do. When EMIs cross 40-50% of take-home pay, you're in the danger zone," Srivastava said.
At FREED, the average customer seeking assistance carries around ₹5 lakh in unsecured debt spread across three to four lenders, with monthly EMIs consuming between 40% and 60% of income. Another major red flag is the growing use of credit for everyday expenses such as rent, groceries and utility bills rather than for planned purchases.
Srivastava noted that many borrowers mistakenly view rolling over credit card dues and paying only the minimum amount as a cash-flow management strategy. In reality, he said, it often marks the beginning of a debt spiral.
Worse situation
Once borrowers start missing EMI payments, many end up making decisions that worsen their financial position.
According to Srivastava, one of the biggest mistakes is avoiding communication with lenders. By ignoring calls or delaying discussions, borrowers often lose opportunities for restructuring or other early-stage relief measures.
Another common mistake is taking on additional debt to stay current on existing obligations. Many borrowers use one credit card to pay another or take app-based loans to cover EMIs, creating the appearance of regular repayments while underlying liabilities continue to grow.
"The first mistake is silence. Many borrowers stop taking calls and don't talk to their lenders early, which closes the door on softer solutions like restructuring," Srivastava said.
Credit cycle
The trend is becoming increasingly common as India's unsecured lending market expands.
Data cited by FREED shows that financially stressed borrowers often have between eight and 15 active credit lines, including personal loans, salary advance products, BNPL facilities and credit cards.
The broader market reflects the same growth. Since 2017, personal loan originations have increased 35-fold in volume, rising from 6 million to 210 million loans. In value terms, the market has expanded from ₹1.5 trillion to ₹12 trillion over the same period.
Meanwhile, personal loan non-performing assets (NPAs) have more than doubled, increasing from $5.2 billion in FY20 to $11 billion in FY24.
The pressure is especially visible among younger consumers. Nearly 39% of young borrowers now use credit for essential expenses such as rent, groceries and utilities, indicating that borrowing has moved beyond discretionary spending.
Borrower support
While India has built a sophisticated lending and collections ecosystem, Srivastava believes borrower-support infrastructure has not kept pace.
He argues that the financial system has focused heavily on making credit accessible while investing less in mechanisms that help borrowers navigate financial distress.
"India has spent the last decade optimising for credit growth and recovery while borrower-support infrastructure has lagged," Srivastava said.
According to him, the next phase of financial inclusion should include structured debt-resolution programmes, stronger emergency savings habits, improved insurance penetration and clearer frameworks for helping distressed borrowers recover.
Srivastava said debt resolution should begin with understanding a borrower's true affordability, followed by structured repayment plans and negotiated settlements with lenders where necessary.
As consumer borrowing continues to rise, experts warn that recognising early signs of financial stress and seeking help before defaults occur could be the difference between temporary cash-flow issues and long-term financial hardship.
Published on: May 31, 2026 9:05 AM IST
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