India’s borrowing habits are entering dangerous territory, warns Nithin Kamath, founder and CEO of Zerodha.

Small-ticket personal loans and credit card loans are on the rise, often fueled by aggressive marketing of fintech apps. Kamath pointed out a disturbing trend: “The defaults of this segment who cannot afford to take loans are starting to rise. These defaults started showing up in the number of banks and NBFCs a couple of quarters ago. We will know the true extent of the problem in the coming quarters.”

Kamath shared CRIF data showing how personal loans in India now total ₹13.7 lakh crore. Public sector banks have 38% of this burden, followed by private banks at 33% and NBFCs at 24%.

However, it is the meteoric rise of small-ticket loans, many below ₹10,000, that raises serious concerns. NBFCs dominate this segment, issuing 94% of these loans, and their share of new loans grew to 38.7% in the first half of FY25 from 33.2% in the year past

“The lowest-hanging fruit and the most profitable thing you can do with your personal finances is to pay off all your high-interest loans, including credit cards,” Kamath advised.

He also highlighted the psychological toll of debt: “If you’re in debt, the psychological effects will be seen everywhere…from your personal life to your workplace.”

Small loans are particularly problematic. Among borrowers with loans between ₹10,000 and ₹50,000, nearly 29.3% experienced a drop in credit scores within six months of the loan. Alarmingly, instead of slowing down, these individuals took on 62.7% more debt, increasing their total debt by 37.6%.

Defaults are rising faster in smaller cities, where the percentage of loans past due in the 31-180 day range rose from 6.8% to 8% in a year. Loans below ₹10,000 have seen defaults over 360 days rise to 39.7%, compared to 24.5% last year.

Kamath reflected on his personal experience: “The worst times in my life have been when I owed money to spend on things I didn’t really need. The first lesson in personal finance is to borrow only when you are sure you can get a return that exceeds the cost of the money.”

These trends are occurring in the context of a broader expansion of the credit market. The unsecured business loan segment, for example, grew by 43.5% last year to Rs 7.8 billion. But delinquencies are also rising in this category, especially in smaller cities where economic growth has not kept pace with credit expansion.

Kamath’s advice is clear: “Making sure you’re going to get out of debt should be the first thing you do, even before you save and invest.”