Swipe, spend, struggle: How credit card defaults are spiking in India

Once a symbol of freedom, credit cards now trap young Indians in growing debt. Could defaults be the new norm?

In Short

• Credit card defaults surge among young millennials and Gen Z
• BNPL schemes and EMI purchases contribute to growing credit card debt
• RBI’s intervention slows credit growth but defaults continue rising

India's credit card boom has reached a tipping point. While credit cards were once seen as a symbol of financial freedom and convenience, they are now pushing many young Indians into a growing debt trap. Defaults on credit card payments have surged, particularly among millennials and Gen Z, despite growing awareness of credit scores.

The growing popularity of Buy Now, Pay Later (BNPL) schemes, EMI-based e-commerce purchases, and easy access to credit have made the situation even more precarious.

In the first half of 2024, credit card defaults climbed to 1.8%, up from 1.7% at the end of 2023, according to data from TransUnion CIBIL. While a 0.1% rise might seem negligible, the real concern lies in the mounting outstanding dues.

Credit card outstanding amounts hit an alarming Rs 2.7 lakh crore by June 2024, compared to Rs 2.6 lakh crore in March. This marks a massive jump from Rs 87,686 crore in March 2019, representing a compound annual growth rate (CAGR) of 24% over five years.

Youth at greater risk of default

The most concerning aspect is the behaviour of young millennials and Gen Z, who are driving this surge in credit card defaults. Sold on the convenience of EMI-based purchases and BNPL schemes, many young borrowers are maxing out their credit limits without even attempting to revolve their loans.

A recent report by Macquarie Capital indicated that most young millennials are using the entire limit and directly defaulting, turning into an NPA without even revolving the loan. The report said net credit losses for credit cards have surged to 5-6%.

E-commerce platforms like Amazon have fuelled this spending frenzy, with the majority of transactions made through credit cards. Experts suggested that the rise of BNPL and attractive EMI schemes on e-commerce platforms are directly contributing to higher credit card spending among the youth.

How defaults spiral out of control

The path to default often starts innocently enough, typically with a large purchase the borrower plans to pay off in easy installments. However, those seemingly manageable payments come with steep interest rates that can climb as high as 48% annually.

As the debt balloons, many borrowers find themselves able to pay only the minimum due each month, trapping them in a cycle of accumulating interest and worsening debt.

A common misconception about credit scores adds fuel to the fire. Many borrowers believe they’re financially stable as long as they continue making minimum payments, which temporarily prevents them from being marked as defaulters.

However, as interest continues to compound, the financial strain intensifies, turning the situation into a downward spiral.

RBI's wake-up call goes ignored

In response to the rapid surge in credit card defaults, the Reserve Bank of India (RBI) has flagged concerns over the growing risk in unsecured loans.

Retail loans, driven largely by personal loans and credit card debt, have been the backbone of Indian banking growth for two decades. However, as the demand for unsecured loans has risen, so have the risks.

The RBI increased risk weights on unsecured consumer credit in late 2023, forcing banks to set aside more capital to cushion against potential losses. The RBI’s measures appear to be working.

According to Macquarie’s Unsecured Retail Index, credit growth in personal loans, credit cards, and other unsecured segments dropped to 15% after the central bank’s intervention.

Despite these efforts, credit card defaults continue to climb. The latest TransUnion CIBIL report highlights a 30% year-on-year decline in credit card originations, as lenders become increasingly wary of the risks associated with unsecured loans.

But the damage is already done—credit card spending hit a record high of Rs 1.72 lakh crore in October 2023, with defaults reaching Rs 4,072 crore in the 2022-23 financial year.

Credit cards: The silent crisis

This isn’t just a problem of overspending. The growing reliance on credit cards to manage daily expenses is a reflection of deeper economic issues. With inflation eating into savings and wage growth stagnating, many Indians have turned to credit cards to make ends meet.

While credit cards offer a quick solution to immediate financial needs, they come with hidden dangers. Interest rates on credit cards are typically between 3.6% and 4% monthly—seemingly manageable until you miss a payment or make only the minimum due. What begins as a minor expense can snowball into an overwhelming financial burden.

Take, for example, Rohan, a 25-year-old from Mumbai, who shared his story with IndiaToday.

After graduating from college, Rohan used his new credit card to cover everyday expenses and even purchased an iPhone on EMI. But when his dues piled up, he could only afford the minimum payment.

Over time, the interest compounded, and his debt spiraled out of control. To escape the mounting pressure, he took out a personal loan to pay off his credit card debt, trading one form of debt for another.

Rohan’s story is all too familiar for millions of Indians caught in the ‘minimum due’ debt trap. It’s a silent crisis that continues to grow as credit cards become more accessible.

Is India headed for a credit card debt crisis?

The numbers paint a worrying picture. Credit card adoption in India has surged by 81% between 2019 and 2024, with the country approaching 10 crore active credit cards.

While the growth in credit card spending has boosted consumption, it also raises the risk of an impending debt crisis. Despite the RBI’s interventions, credit card defaults are climbing at an alarming rate, and the trend shows no sign of slowing down.

As the economy shifts from savings-driven to consumption-driven, the temptation to spend beyond one’s means will continue to grow. Unless stricter regulations and better financial education are implemented, India’s credit card boom could quickly turn into a full-blown financial catastrophe.

The allure of easy credit is real, but so is the danger of falling into a debt trap that may be impossible to escape. For many Indians, the power to swipe could soon become a financial nightmare.