EMI- A Dangerous tool

BLOG 5/2026 DATED 15TH JANUARY 2026

It is a normal mode of household financial management in our country that people take interest-based loans on EMIs and keep paying these EMIs for their entire life. As such, this is probably the only way to create assets (rather easy assets) in these times. Recently an article was published in Mint Money and other newspapers as well, showcasing the evil effects of EMI based loans. The article first discussed the data that clearly leads to distress but in the later part turned the centre of discussion from the problem of EMI to the illegal recovery methods adopted by the recovery agents. Here, the problem is multi-fold that lies with the financial system, public, banks and at regulatory level as well. Some of the points highlighted by the report are as under:

• 85% of the distressed borrowers reported that more than 40% of their income goes in paying EMIs.
• financially stressed individuals with an average monthly income of ₹35,000 to ₹65,000 have an average EMI obligation of between ₹28,000 and ₹52,000.
• 65% of borrowers surveyed have also reduced their essential spending, including stopping children’s education, deferring medical treatment, cancelling insurance policies, cutting food/nutrition budget, and others.
• 16% borrowers have resorted to salary draws and advances, while 15% have been forced into asset liquidation, by selling gold/jewellery (8%), property sale (2%), and stock / mutual fund redemption (5%).
• A considerable 72% of the borrowers surveyed report some form of harassment from recovery agencies

Detailed report and the figures can be seen in the link at the bottom. We will try to analyse where the buck should stop:

Financial System: 

At macro level, in order to boost consumption, the financial system has simplified the process of loan taking. App based loan, Instant loan, documents free loan etc terms are used to cajole the target customer and the money is pumped into the market. This pumping of money results in higher purchasing power and that results in higher demand, higher production, higher GDP etc. However, in doing so somewhere system has ignored that the public is not all aware, and ready money is a natural attraction. System prompts people to ‘come and take’ rather ‘sit and take’ approach of obtaining money, clearly ignoring that lack of repayment is going to hurt not only the one who has taken loan but also to the entire economy. This approach has been allowed to continue even if the credit growth of banks is consistently surpassing the deposit growth in the recent past.

Public:

It is surprised to see that not only an uninformed person but the well-informed people also fall into this EMI traps. They create fixed assets viz. Houses (more that one), Vehicles and other costly durables that are otherwise out of their reach by borrowing money at EMI. Those with regular income and decent jobs do manage this somehow but others simply see their pocket only when a recovery agent rings the bell. On many occasions we have seen people producing bogus income proofs to get higher loan. People filing income tax returns just to obtain a loan from the bank. If financial system is at fault of ballooning the consumption, public in general is also at fault in borrowing when they are aware that they have repayment issues.

Banks & other lenders:

It is the duty of the bank to assess that a customer is actually strong enough to repay or not. However, this process of due diligence is often ignored and the sanctioning authority is mare concerned on the paper work rather than the actual repayment capacity. This happens due to 2 reasons. One, is competition from private players who are sometimes ready to give loan to anyone who is ready to take. In order to compete with them sometimes banks also ignore the finer aspects of repayment capacity. Second, is the pressure to perform and at many occasions it is totally unprofessional and undesirable. Targets are allocated to the field without proper study and with only consideration of a big balance sheet rather than strong balance sheet.

Regulator:

The regulator, RBI and also the Ministry of Finance, Govt of India, knowing everything, allows all this to happen right under their nose. Issuing a few circulars on lending norms and recovery timings is not sufficient. Their job is to ensure that the credit does not flow to the undesirable pockets. But they also choose to be fit on paper rather than fit in action. The regulators and the Ministry have the necessary tools to control this menace but they choose to be silent and sometimes punishing a bank for coercive recovery method.  

The solution to the problem does not lie with the public but it lies with the Regulator and the Government. The policies should be modified such that the credit flow should be directed towards production rather than consumption. Interest rates should be brought down to the bare minimum level so that amount of EMI remain less and within the reach.

People should buy and create assets only to the extent of their actual capacity, to the extent possible obtaining loans only when utmost required.

References:

85% of distressed borrowers forced to pay over 40% of their income towards EMIs: Survey

Drowning in debt: How easy loans are turning into an EMI nightmare for Indians – India Today