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In the ongoing financial year (FY25), the financial challenges that have persisted for the past few years show no signs of abating. Recently, several prominent banks, financial institutions, and entities—such as Bank of Baroda, HDFC Bank, PayTM, IIFL, JM Financial, and Paisa Lo—have made headlines for con-cerning reasons. These develop-ments involve both public and private sector banks, as well as non-banking financial companies (NBFCs) and fintech firms, suggesting that the entire financial sector is under scrutiny. This has raised questions about whether the emerging trends in the financial sector are moving in the right direction. While each segment—banks, NBFCs, and fintech companies—faces its own unique challenges, collectively, they pose a significant threat to the Indian economy and the financial well-being of its citizens.

For banks, challenges persist on both the deposit and credit fronts. On the deposit side, data reveals that Indian banks faced a liquidity shortfall of approximately ` 3 lakh crore at the end of January 2024—a 14-year high—which continues to this day. This liquidity crunch is attributed to three main factors: reduced government expenditure, increased withdrawals by individuals to meet tax obligations, and a decrease in public deposits. As a result, banks are forced to borrow funds by pledging securities to secure market borrowings at elevated rates or issuing Additional Tier 1 (AT1) bonds. Moreover, due to high interest rates, deposits are primarily coming in the form of savings accounts or fixed deposits rather than current accounts. This shift has significantly impacted banks’ profitability, particularly with respect to net interest earnings, which are squeezed by the differential between interest income from credit extended and interest paid on deposits.

On the lending side, a troubling dichotomy is emerging. Despite high interest rates, the demand for personal loans continues unabated, while some small banks, struggling to stay solvent amidst the liquidity crunch, are engaging in reckless lending practices. These banks are extending credit to financially unsound individuals in blatant disregard of regulatory norms. This trend portends a looming financial crisis. The surge in personal loans, particularly during a period of widespread unemploy-

ment and a downturn in small business activity, raises serious concerns. Furthermore, the un-checked lending practices of small banks, unrestrained by regulatory oversight, could lead to catastrophic consequences. Although the govern-ment and central bank are aware of these developments and have taken corrective measures, even the latest directives are being followed by only a few major banks, and only to a limited extent.

The Reserve Bank of India (RBI) has issued directives over the past year, cautioning banks to maintain higher reserves to address potential emergencies and to be vigilant about the misuse of credit cards. As a result, banks have become more cautious in their lending practices, especially concerning personal loans. This has created a gap in

lending that is being filled by NBFCs (such as Bajaj Finance, Muthoot, Cholamandalam, and Tata Capital) and fintech companies (like PayTM, PhonePe, Groww, and PolicyBazaar), which are aggressively disbursing loans to marginally creditworthy individuals, often without requiring collateral or deposits. This proliferation of unsecured lending by non-traditional financial institutions has raised concerns about widespread defaults and the systemic risks that may accompany such reckless practices.

In India, NBFCs and fintech entities vary widely in size, from large to small. Larger NBFCs typically secure loans from commercial banks at high interest rates, then re-disburse these funds to smaller NBFCs or fintech companies at even higher rates. These smaller entities, in turn, extend loans to individuals who meet their criteria, often disregarding regulatory norms and without requiring collateral. This enables even financially unsound individuals, who have been denied loans by banks, to access credit. Amidst India’s escalating income inequality and dwindling employment opportunities, these companies have developed a predatory lending model, trapping vulnerable individuals in debt by imposing exorbitant penalties for non-payment of interest. A notable example involved a fintech company that charged an egregious interest rate of 125% on a loan to an educational institution, causing the outstanding debt to balloon from ` 15.9 crore in May 2019 to ` 23 crore in June 2019. This is just one instance of fraud, with numerous similar cases pending in courts across the country. The true extent of the danger posed by these unscrupulous lending practices far exceeds these isolated incidents.

As discussed, unemployment in India is not decreasing, and income and savings levels are falling daily, compelling many individuals to resort to borrowing to sustain their consumption patterns. This has led to an exponential surge in private loans. In the near future, the situation may worsen as the Indian economy cannot remain unaffected by the

forecasted global recession. As a result, the risk of loan defaults is poised to escalate, with smaller banks, NBFCs, and fintech entities likely to be the first to bear the brunt. Consequently, as these entities fail to repay their loans, larger NBFCs and, eventually, the banks themselves will be

affected. This growing debt bubble in the Indian financial sector could lead to widespread destruction, with signs of trouble already beginning to emerge. The public’s deposits, once considered a safe haven, are now at risk in light of these emerging financial trends, underscoring the urgent need for vigilance and reforms to mitigate this looming crisis.