Banks favour existing clients as new borrowers struggle to access formal credit

India's banking sector is increasingly skewed toward serving existing customers rather than extending credit to new borrowers, according to findings highlighted by the Reserve Bank of India's Deputy Governor. The proportion of fresh businesses accessing formal credit has contracted significantly, falling to 42 per cent in the fiscal year ending March 2026 from 52 per cent three years earlier.

The trend presents a paradox within India's credit landscape. While outstanding commercial credit expanded at a robust 14 per cent during the same period, this growth has been concentrated among established borrowers rather than new entrants seeking to participate in the formal financial system.

The RBI's concerns suggest that technology investments made by banks—typically deployed to enhance operational efficiency and risk management—may have inadvertently created barriers for unfamiliar borrowers. Digital lending platforms, automated credit assessment tools, and algorithmic decision-making systems often rely on historical data and established credit profiles, potentially disadvantaging first-time borrowers without prior banking relationships.

This dynamic raises questions about financial inclusion and the banking sector's role in supporting entrepreneurship and economic expansion. A shrinking proportion of new borrowers entering formal credit channels could impede broad-based economic growth and limit credit availability for emerging enterprises and small businesses.

The findings underscore the need for banks to reassess their technological frameworks and lending protocols to balance operational efficiency with broader financial inclusion objectives.