The rising defaults on credit cards are a danger signal that the rapid expansion of unsecured lending has gone too far. Critics warn that banks and fintechs are repeating mistakes seen in the 2010s microfinance crisis, pushing high-cost credit to borrowers who cannot afford it.
Sub-prime lending has grown unchecked. Many cardholders only make minimum payments, accumulating debt at interest rates exceeding 40% per year. When an economic shock hits, these borrowers default en masse. The delinquency trend is accelerating, with some banks reporting double-digit growth in bad debts.
Regulators have expressed alarm. The RBI's financial stability report highlighted credit cards as a potential vulnerability. Yet banks continue to chase volume over quality, incentivizing sales teams to issue cards without verifying repayment capacity.
Consumers in lower-income brackets are worst affected. Late fees, penalties, and credit score damage trap them in a cycle of debt. For the economy, a spike in defaults could force banks to set aside large provisions, hitting profitability and reducing lending to other sectors.
The comparison to the sub-prime crisis in the US in 2008 is not far-fetched. India's regulators must act now to rein in reckless lending before the problem escalates. Stricter norms on credit card exposures and mandatory cooling-off periods could help prevent a full-blown crisis.