Reliance on informal finance persists despite multiple financial inclusion measures: Report
Non-institutional channels of borrowing such as moneylenders, shopkeepers, and family constitute a major chunk of borrowing for the poor despite several initiatives to promote financial inclusion, shows a study by
Piramal Enterprises
.
To enhance the share of formal finance, Debopam Chaudhuri, Chief Economist, Piramal Enterprises, says that non-banking finance companies can step in to bridge this gap, provided they are given access to cheaper resources such as the ability to raise fixed deposits and a liquidity backstop window by the RBI to secure short-term loans for top-tier NBFCs.
The findings of the report show micro-business owners and economically weaker segments (EWS and LIG) remain underserved in terms of
access to formal credit
, while banks and finance companies are targeting Tier 2 and Tier 3 towns for financial inclusion.
'These segments of Bharat continue to depend heavily on informal channels, with banking and fintech innovations yet to significantly make a meaningful impact on their access to formal credit,' Chaudhuri stated.
The economic aftermath of the COVID-19 pandemic triggered major shifts in borrowing behaviour. Reverse migration increased informal and agricultural employment in lower-income states, further boosting dependence on informal credit.
Live Events
'Over 55% of daily-wage households reported active informal loans, even as formal lenders became more cautious due to rising credit risk,' Chaudhuri said.
The report also reveals stark state-level disparities. While Kerala, Tamil Nadu, and Karnataka show strong formal credit presence, driven by gold loans and fintech usage, states like Bihar, Jharkhand, and West Bengal have over 57% of households relying on informal borrowing. Notably, Punjab has transitioned from a 'high-income, low-borrowing' profile in FY19 to a 'high-borrowing, low-income' state, implying increasing reliance on informal credit due to lower penetration of financial inclusion.
Data indicate that although there were early signs of a shift from non-institutional to institutional borrowing between FY15 and FY19, the disruptions caused by COVID-19 and the accompanying rise in unemployment reversed this trend. Many borrowers were compelled to return to informal lenders, a pattern that coincided with large-scale urban-to-rural reverse migration and a subsequent increase in agricultural employment triggered by the 2020 lockdowns.
At the global level, while other economies, both developed and developing, witnessed a declining trend in the share of non-institutional credit, India observed rising incidences of non-institutional lending vis-à-vis institutional lending. In 2021, borrowing from non-institutional sources was 2.63 times that of borrowing from institutional sources in India, compared to 0.6 times in Brazil and 0.27 times in the USA. 'This implies that for every two people borrowing from institutional sources, five people were opting for non-institutional sources of borrowing,' Chaudhuri said.
The data suggest rising risk aversion of institutional lenders to fund daily-wage workers with no long-term work commitments, which has prompted wage labourers to rely on non-institutional moneylenders.
More than 55% of households associated with this profession have active loans, largely from non-institutional sources, highlighting both the demand for loans and the lack of supply from institutional sources, Chaudhuri said in his report titled Prevalence Of Non-Institutional Borrowing Among Indian Households: A Pre and Post COVID-19 Analysis.
Self-employed entrepreneurs are increasingly relying on non-institutional sources, with the annualised growth of households borrowing from such sources rising at a much faster pace than those borrowing from institutional lenders. 'This depicts increased risk aversion among institutional players to support small businesses,' the report said.
In the case of industrial workers and white-collar professionals, incidences of non-institutional borrowing are slowing down due to the advent of new-age fintech lenders and easier access to institutional credit. These cohorts appear to be the biggest beneficiaries of the democratisation of finance currently underway in India, notes the report.
Over the last decade, multiple policy initiatives resulted in 77.5% bank account ownership among adults by 2021. Measures like the India Stack, policy interventions such as Jan Dhan (2014), Mudra (2015), Svanidhi (2020), and Vishwakarma (2023) Yojanas, along with the arrival of fintech players who harnessed technology to curate financial services for the previously unbanked population, have contributed to this progress.
The data used for this analysis were sourced from the Centre for Monitoring Indian Economy's (CMIE's) Consumer Pyramid Household Survey (CPHS) dataset. This private agency conducts high-frequency, large-scale surveys that have become increasingly popular for assessing short-term changes in the economic conditions of Indian households.
The report says NBFCs can facilitate migration from informal to formal sources of borrowing if they are supported in reducing their funding costs, which would enable passing on to end borrowers,' Chaudhuri said.
Measures such as a liquidity backstop window by the RBI to secure short-term loans for top-tier NBFCs can improve their credit ratings and reduce borrowing costs. Additionally, granting deposit-taking licences to well-managed, large NBFCs, with appropriate regulatory safeguards, would allow these institutions to diversify funding sources beyond banks and raise long-term liabilities at lower costs, thereby reducing ALM risks.
A dedicated refinancing window for NBFCs is urgently needed to alleviate liquidity concerns. Furthermore, simplifying the ease of doing business for these institutions by lowering the loan amount threshold for enforcing security interests under the SARFAESI Act from ₹20 lakh to ₹1 lakh would be highly beneficial. 'These reforms would equip NBFCs with greater capacity to expand their reach, serving a larger portion of India's population who still struggle to access formal financial services,' said Chaudhuri.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Time of India
41 minutes ago
- Time of India
BMC plan to auction prime plots stalled as two govt bodies want to procure them
Mumbai: Eight months after BMC floated tenders to auction three prime land parcels in Mumbai—at Malabar Hill, Worli, and near Crawford market in Fort—the fate of the proposed sale remains uncertain. The move had marked the first time the civic body opted to auction its own plots, indicating a shift in its strategy to monetise real estate assets and generate long-term revenue. However, the auction process faced multiple hurdles. The plan to auction the Malabar Hill plot was scrapped early on following objections from BEST as the land has high-tension transmission lines running through it. Additionally, over 60 residents from the area raised objections, pointing out that the property card of the plot classifies it as a BMC-owned space designated for a public garden. The civic body then proceeded with plans to auction the remaining two plots. These vacant land parcels are to be leased for 30 years, with a provision for renewal for another 30 years, and are expected to bring in substantial revenue for BMC. However, an official said, Central Railway requested a portion of the plot near Crawford market—for free—to construct a passenger outlet from CSMT via a proposed skywalk. "Since the entire plot was listed for auction, carving out a part of it may not be viable," said a civic official. A high-level meeting on the matter was recently held with the chief secretary, the official added. As for the Worli plot, RBI approached BMC independently, although it did not participate in the bidding process. TOI reached out to RBI for comments but got no response. BMC officials confirmed that while bids were received for the Worli land, the responses are still under review. In Oct last year, when the tender was issued a few days before the model code of conduct for the assembly elections kicked in, Shiv Sena (UBT) leader and MLA Aaditya Thackeray opposed the auctions, claiming that BMC is gradually losing control of vital land resources, which could otherwise be used for public infrastructure or amenities.
Economic Times
an hour ago
- Economic Times
As Indians choose premium spirits, cork makers pop the champagne
TIL Creatives Representative AI Image Mumbai: From Indian single malts and scotch to sparkling wines and cognac, the country's spirits premiumisation drive has a strong connection with the province of Ribatejo, around 80 km east of Lisbon, Portugal. After all, Portugal produces two-thirds of all processed cork products in the world and is also the home to Corticeira Amorim, the world's largest cork manufacturer. While most global companies, including Diageo and Pernod Ricard, have been using wooden stoppers-made from the bark of cork oak trees-for their scotch and premium brands, the Indian market really uncorked after the rise in Indian single malt as well as focus on premium gin and vodka. Numbers bear witness: Corticeira Amorim, which accounts for 70% of the global market share for cork stoppers, said India is among the top 3 priority markets for them after its sales in the country nearly tripled to 10 million cork stoppers in 2025 compared to three million in the pandemic year. "India is one of the largest spirits markets in the world and there is clearly a market potential of premiumisation, which means India can do very well even on the international scene. We will have a role to play in a very important and fast growing spirit market," Antonio Rios de Amorim, chairman of the over 150-year old firm Corticeira Amorim, told ET in an exclusive interaction. "When you start getting the confidence that you are producing quality spirits at world-class level, we see the usage of cork for a premium image."It takes each cork oak bark 25 years before it can be stripped for the first time and an average of over 40 years before the tree starts producing cork that can be used commercially. As a result, it will be a long way for India to use locally produced corks despite the country selling over 400 million cases of spirits every year and is the world's biggest whiskey market, said Amorim, who partnered Spiritual Luxury Living for its India marketing and distribution a decade ago. "The companies in India need everything to be cost-effective in order and we need to be innovative to service the local brand. A lot of requirements and a lot of ideas on innovation from the Indian market can be very very fruitful for us not only for Indians but also for the market worldwide. So this is inspiring because the market is very dynamic and we as a global player cannot be missing out," Amorim the Covid-19 pandemic, between 2020 and 2024, Indians hit a new high with top-shelf brands such as Johnnie Walker, Glenfiddich and Dewar's. Scotch sales doubled while Irish whiskey grew five times, Japanese whisky six-fold and American whiskey three times. Several home-grown single malts and other spirits have also entered the market to cash in on a premiumisation trend among Indian said cork is the preferred stopper, from premium through to super-premium spirits, especially as single malt Scotch whiskies from Glenlivet, Macallan, Glenfiddich and Laphroaig - consistently use cork capsulated stoppers. "Historically, luxury and imported whiskey and wines have used wooden cork stoppers creating a perception that any product with cork is premium. When Indian manufacturers started creating high-end and quality products, the packaging needed to match the liquid inside the bottle. And wooden cork can clearly create the perception of premium and is a differentiator from products using cheaper plastic, synthetic or metal caps," said Amar Sinha, chief operating officer at Radico Khaitan that uses cork for brands such as Jaisalmer gin, Sangam and Ranthambore whiskey. Amrut was among the first Indian single malt brand to use the wooden cork stoppers way back in early 200s, but the market recently saw malts by Piccadily Agro that sells Indri and international players including Pernod Ricard and Diageo adding Indian brands such as Longitude 77 and Godawan, helping growth the segment.
Time of India
an hour ago
- Time of India
As Indians choose premium spirits, cork makers pop the champagne
Mumbai: From Indian single malts and scotch to sparkling wines and cognac, the country's spirits premiumisation drive has a strong connection with the province of Ribatejo, around 80 km east of Lisbon, Portugal. After all, Portugal produces two-thirds of all processed cork products in the world and is also the home to Corticeira Amorim , the world's largest cork manufacturer. While most global companies, including Diageo and Pernod Ricard, have been using wooden stoppers-made from the bark of cork oak trees-for their scotch and premium brands, the Indian market really uncorked after the rise in Indian single malt as well as focus on premium gin and vodka. Numbers bear witness: Corticeira Amorim, which accounts for 70% of the global market share for cork stoppers, said India is among the top 3 priority markets for them after its sales in the country nearly tripled to 10 million cork stoppers in 2025 compared to three million in the pandemic year. "India is one of the largest spirits markets in the world and there is clearly a market potential of premiumisation, which means India can do very well even on the international scene. We will have a role to play in a very important and fast growing spirit market," Antonio Rios de Amorim, chairman of the over 150-year old firm Corticeira Amorim, told ET in an exclusive interaction. "When you start getting the confidence that you are producing quality spirits at world-class level, we see the usage of cork for a premium image." It takes each cork oak bark 25 years before it can be stripped for the first time and an average of over 40 years before the tree starts producing cork that can be used commercially. As a result, it will be a long way for India to use locally produced corks despite the country selling over 400 million cases of spirits every year and is the world's biggest whiskey market, said Amorim, who partnered Spiritual Luxury Living for its India marketing and distribution a decade ago. "The companies in India need everything to be cost-effective in order and we need to be innovative to service the local brand. A lot of requirements and a lot of ideas on innovation from the Indian market can be very very fruitful for us not only for Indians but also for the market worldwide. So this is inspiring because the market is very dynamic and we as a global player cannot be missing out," Amorim added. Post the Covid-19 pandemic, between 2020 and 2024, Indians hit a new high with top-shelf brands such as Johnnie Walker, Glenfiddich and Dewar's. Scotch sales doubled while Irish whiskey grew five times, Japanese whisky six-fold and American whiskey three times. Several home-grown single malts and other spirits have also entered the market to cash in on a premiumisation trend among Indian tipplers. Companies said cork is the preferred stopper, from premium through to super-premium spirits, especially as single malt Scotch whiskies from Glenlivet, Macallan, Glenfiddich and Laphroaig - consistently use cork capsulated stoppers. "Historically, luxury and imported whiskey and wines have used wooden cork stoppers creating a perception that any product with cork is premium. When Indian manufacturers started creating high-end and quality products, the packaging needed to match the liquid inside the bottle. And wooden cork can clearly create the perception of premium and is a differentiator from products using cheaper plastic, synthetic or metal caps," said Amar Sinha, chief operating officer at Radico Khaitan that uses cork for brands such as Jaisalmer gin, Sangam and Ranthambore whiskey. Amrut was among the first Indian single malt brand to use the wooden cork stoppers way back in early 200s, but the market recently saw malts by Piccadily Agro that sells Indri and international players including Pernod Ricard and Diageo adding Indian brands such as Longitude 77 and Godawan, helping growth the segment.
