The threat of EMI consumer finance: An increasing number of Indian banks now allow customers to convert routine purchases — restaurant bills, food delivery, or movie tickets — into equated monthly instalments. What began as a harmless convenience now represents a quiet shift in how financial institutions frame credit. For many households, such tools smoothen uneven cash flows, help avoid liquidity shocks, and even build credit history for first-time borrowers. These are tangible benefits that policy must preserve.
But when institutions entrusted with public savings begin to normalise credit for perishable consumption, the question changes from what helps households today to what shapes their financial behaviour tomorrow. If credit products are designed without accounting for long-term household costs, the risks — though invisible initially — can accumulate into systemic vulnerabilities.
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Household credit and EMI consumer finance
EMI consumer finance is not inherently harmful; it can cushion families during emergencies or help spread the cost of essential purchases. In countries with weak social safety nets, such flexibility can act as informal insurance. Yet what helps at the micro level may weaken resilience at the macro level.
The Reserve Bank of India’s Financial Stability Report 2024 highlighted that unsecured personal loans and credit card balances are expanding faster than secured lending. Data from TransUnion CIBIL show credit card outstandings have tripled between 2019 and 2024. The danger is gradual: household debt pressures build slowly and are hard to unwind once habits form.
Reconciling this duality — relief versus risk — is the central policy challenge. Regulation must protect consumer autonomy but also ensure that convenience does not become dependence.
Behavioural nudges and the power of defaults
Behavioural economics offers insight into how design shapes decisions. As Richard Thaler and Sendhil Mullainathan have shown, defaults and framing can profoundly influence choices. India’s auto-enrolment in provident funds or UPI’s auto-debit features are examples where smart design has delivered social benefits.
The concern is not about influence itself, but about what is being influenced. A pre-checked “convert to EMI” box on a dinner bill or a streaming subscription subtly reframes borrowing as normal behaviour. When fintechs pioneer such defaults and banks replicate them, they institutionalise a culture of small-ticket debt. Over time, this quiet shift can alter spending habits and financial prudence.
Emerging credit patterns
Recent surveys highlight how pervasive this trend has become. A Phi Commerce (2024) survey found that nearly a third of digital transactions were credit-driven—two-thirds through EMIs and the rest via credit cards. A Cred-YouGov poll showed that 97% of credit card holders carry EMIs or personal loans. A Think360.ai study found that 93% of salaried Indians earning below ₹50,000 a month rely on credit cards or buy-now-pay-later (BNPL) products, signalling growing vulnerability.
Meanwhile, the Household Consumption Expenditure Survey (2023–24) shows non-food discretionary spending constitutes 53% of rural and 60% of urban consumption. Credit for durable goods can support aspirations, but trivial or perishable consumption financed through EMIs poses monitoring challenges.
While EMI consumer finance is used as a budgeting tool, the risk lies in habitual rollovers—echoing BNPL delinquency trends seen in the US and Europe, where regulators have mandated stronger affordability checks. If 10 million low-income earners roll over ₹500 in discretionary EMIs monthly, the aggregate ₹6,000 crore may seem small to the system but significant for households living without buffers.
Bank incentives and governance gaps
Banks’ motivations while extending EMI consumer finance are clear: fee and interchange income from instalments, higher customer engagement, and competitive parity with fintech players. These incentives encourage repeat usage and “stickiness,” but not prudence. The result is institutional behaviour that rewards frequency of borrowing over quality of repayment.
Global precedents show how to rebalance this. The UK’s Financial Conduct Authority (FCA) now evaluates firms under a Consumer Duty framework that measures outcomes like repayment discipline and complaint resolution. India could adopt a similar approach—tracking not just revenues, but how many customers reduce their revolving balances or exit high-cost credit. Prudence metrics could include the proportion of accounts showing improved repayment trends or reduced exposure to repeat EMI consumer finance on essentials.
Implementation is feasible. Banks already collect repayment data, and supervisory reporting could extend to anonymised quarterly dashboards. The RBI, Indian Banks’ Association (IBA), and credit bureaus could jointly standardise these metrics—embedding consumer well-being into regulatory oversight.
A proportionate policy response
Balanced regulation need not ban small-ticket EMI consumer finance but should ensure transparency and accountability. A policy framework could include:
- Consumer impact assessments: Board-level approval of retail products, similar to SEBI’s suitability norms for investors.
- Standardised disclosures: Simple EMI risk labels, akin to SEBI’s “riskometer” for mutual funds.
- Granular reporting: Bank-wise data on EMI usage by category and income cohort, mirroring RBI’s microfinance norms.
- Affirmative consent: Prohibit pre-checked EMI consumer finance defaults; enforce opt-in consent under digital lending guidelines.
- Duration limits: Shorten EMI tenures for perishable goods, as RBI already does in microfinance.
- Industry code of conduct: An IBA-led update covering marketing ethics and customer engagement practices.
Such measures would align incentives, promote transparency, and reduce the risk of financial fragility creeping into middle-class consumption.
Financial literacy and EMI consumer finance
Regulation must go hand-in-hand with education. RBI and banks already invest in financial literacy campaigns, but messaging should focus on the long-term costs of EMI consumer finance. Fintech apps can include visual dashboards to show the cumulative burden of small borrowings — turning transparency into behavioural feedback.
Financing dinners or movie tickets on EMI consumer finance will not trigger a banking crisis, but it could reshape financial habits in ways that weaken household resilience. The question is not whether individuals should borrow for consumption, but whether banks, as custodians of trust, should normalise it.
Innovation in retail finance should enhance resilience, not dependence. A prudent policy design can retain the benefits of flexible credit while curbing its excesses. India’s regulatory task is to ensure that financial innovation does not drift into moral hazard—where convenience today becomes vulnerability tomorrow. In the long run, resilience, not novelty, will determine the strength of India’s consumer credit system.
Avishek Agarwal is an investment professional with nearly two decades of experience in global and Indian capital markets.